What Are Participants Doing With Lump Sum Distributions?

Forty four percent said that they had rolled over the entire amount of their most recent distribution into an IRA or other retirement plan and another 40% of recipients said that they had saved at least part of the distribution in some other way, according to data collected by the Census Bureau included in the updated report.

Nine of the methods participants used to save retirement money fit into the standard economic definition of saving, including:

• Investing in an IRA, annuity, or other retirement program
• Investing in a savings account or certificate of deposit
• Investing in stocks, mutual funds, bond, or money market funds
• Investing in land or other real property
• Investing in a family business or farm
• Purchasing a home, paying off mortgage, or making home improvements
• Paying bills, paying off loans or other debts

The inclination to spend, rather than roll over their retirement plan distributions hasn’t changed much since data was collected from the Census Bureau in 1998, according to the report. In 1998, 42.4% of respondents who had received a lump sum distribution within the past five years said they had rolled over the full distribution into another tax-deferred retirement plan. In 2003, 45.8% said so.

The report indicated that younger workers are more likely to spend their lump sum distributions than older workers, a similar finding to other surveys (See Hewitt: K Plan Cashouts Still Common ). A typical 25-year-old today will work for seven or more employers before reaching age 65, and could receive several distributions before reaching retirement age. If the person is spending the money rather than saving it, their future retirement income could be jeopardized.

The CRS reported on the amount of retirement wealth lost as a result of workers spending their retirement money. If the median lump-sum distribution ($6,000) received through 2002 that was not rolled over had instead been rolled over into an account that grew at the same historical rate as the Standard & Poor’s 500 Index, it would have had a median value of $7,214 by 2003. According to the report, if this amount were to remain invested, it would grow to an estimated value of $31,100 by age 65.