Current Thinking

Pentegra’s Harris Poll: Widespread Confusion Over Accessing Retirement Funds

A blog by Richard Rausser, CPC, QPA, QKA, Senior Vice President- June 23, 2015

In this second of three posts discussing Pentegra’s latest survey conducted by Harris Poll, I will look at the surprising lack of knowledge that a majority of respondents have when it comes to accessing and stretching their retirement savings.

Our poll revealed that more than half (55 percent) of those with retirement savings have no plan for how they will access and stretch their money once they retire; even more alarming, one in five respondents stated that they had not given this issue any thought at all.

Action with respect to distribution varies significantly by demographics. The good news is that men, seniors, those with higher assets and education, married couples, and those with children in their household are much more likely to have developed a distribution plan as, compared to their counterparts.

Still, it is clear that more education is needed on the various distribution options. In this part I will limit the discussion to lump sum payments and regular installment payments, although there are other options as well.

Your plan most likely offers a lump sum distribution option; generally such distributions can be made in full or partial form. A couple of negatives are immediately apparent with this approach, however. The pitfalls of simply emptying your retirement fund and spending it as you wish – either in a carefree fashion or under a carefully observed monthly budget – are self-evident: what happens when the money runs out, or if an unexpectedly large expense (such as an unforeseen medical procedure) arises?

Tax implications are also of critical importance with lump sum distributions. Taking a lump sum distribution will subject you to federal income tax as well as any applicable state and local income taxes. If you are currently under age 59 ½, you may also be subject to an early distribution penalty. Such implications and penalties can quickly erode your retirement savings.

Lump sum distributions can also leave you open to greater investment risk, depending upon whether and how you chose to reinvest your retirement benefit. With investing, there is always some risk involved. Stock and bond prices are affected by market volatility due to factors such as changing world events, economic cycles, and changes in interest rates.

If you take a more conservative approach by, for example, by investing in money market instruments, you may encounter the equally important threat of inflation risk, as over time those types of investments may not produce enough of a return to outpace the effects of inflation.

While taking a full or partial lump sum distribution provides you with immediate access to your retirement savings, there may be costly long-term consequences. The Internal Revenue Service classifies a cash distribution from a retirement plan as income to the person receiving it. It is important to keep in mind that your tax bracket is determined by how much income you earn. If you take a lump sum distribution from your retirement plan, you could increase your income level for that calendar year dramatically, potentially putting you in a higher tax bracket. By considering other distribution options, you may be able to preserve more of your savings.

Installment payments contribute another distribution alternative. Installment payments can serve as a way to structure your retirement savings to provide regular income throughout retirement. An installment payment program can enable you to make long-range plans so that you can use personal savings and other income sources for whatever you like without worrying about using up all of your retirement income.

Installment payments generally offer a great deal of flexibility. You can structure your payments, based upon an income stream and cycle (annual, quarterly or monthly) that works best for you. Installment payments based either on a percentage of your savings or as a specific flat dollar amount.

In my previous post, I cited the purchase of an annuity as a potentially strong addition to one’s retirement fund. Keeping in mind your average life expectancy, a combination of an annuity and partial lump sum distribution may best meet your needs. Such a combined approach provides the security of a guaranteed stream of retirement income provided by an annuity along with the flexibility of a lump sum distribution.

In my third post about Pentegra’s Harris Poll findings, I will discuss Social Security as part of one’s retirement income and look at where it is now and where it might be headed.