A questionable snapshot of future income
It’s not unusual for savers to ignore their 401(k) statements during market downturns, and that’s not necessarily a bad strategy. If you’re years from retirement, you’ve got plenty of time for your investments to recover, and sticking your statement in a drawer could prevent you from taking actions you may regret later.
But if you’re courageous enough to review your recent 401(k) statement, you might see something that’s even more alarming than the recent performance of your investment portfolio. A provision in the 2019 Setting Every Community Up for Retirement (SECURE) Act requires companies to include an illustration in their retirement plan’s quarterly or annual statements that estimates the amount of monthly income your balance would provide if you converted the funds to an annuity.
Many savers will see these illustrations for the first time this fall; some providers have already started to offer the illustrations to plan participants.
Here’s an example of what you might see: Suppose you have $100,000 in your 401(k). At age 67, you would receive about $576 a month for a single-life annuity, or about $487 a month for a joint and 100% survivor annuity. That’s not much, especially in these inflationary times.
While the illustrations may be useful for older workers who have accumulated a large balance and are close to retirement, critics worry that the illustrations will alarm younger savers who have a modest amount in their account. They point out that the illustrations assume you won’t make any additional contributions to your plan, and they don’t account for future growth of your investments.
The illustrations “use conservative assumptions that are likely to understate the amount of income that will be available to many participants in retirement,” UBS Financial Services said in a July investment report. UBS also noted that the illustrations assume you’ll invest your entire balance in an immediate annuity, which is something even supporters of annuitizing a portion of your portfolio advise against.
The Insured Retirement Institute, a trade association, stated in a comment letter to the Department of Labor that without supplemental tools, such as projections of how much additional contributions would add to the balance, younger workers could end up with a “discouraging picture” of the amount of guaranteed income their savings would buy.
Annuity providers hope the DOL will allow plans to include future contributions, company matches and investment returns in the estimates of annuity income. Participants in the Thrift Savings Plan, the federal government’s version of a 401(k) plan, already receive those kinds of projections in their plan statements.
In the meantime, there are other tools workers can use that could provide a more accurate estimate of how far their savings will go in retirement — and help them take steps that will improve their retirement security. A website sponsored by the American Institute of Certified Public Accountants, 360 Degrees of Financial Literacy, offers a free retirement-income calculator that allows you to estimate how much income your savings could generate, based on your age, portfolio balance, annual contributions, projected investment returns and the number of years you expect to live in retirement. You can adjust your projections to account for inflation. Find the calculator at www. 360financialliteracy.org/ Calculators/ Retirement-Income.