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Your next quarterly 401(k) statement can be alarming.  here’s why


Your internal alarm bells may ring when your next 401(k) plan statement is read — at first glance, at least.

Traditional 401(k) statements — regular notices that arrive by mail or online — show investors how much money they have saved for retirement, among other information such as investment allowances. Soon they will also see how their nest egg translates into a monthly income stream.

It’s part of an ongoing effort by policymakers to reframe how Americans think about retirement savings: as a regular paycheck from work or Social Security payments, for example, instead of a lump sum.

The latter may not tell investors much about how their total savings will or will not adequately fund their retirement lifestyle. A nest egg of $125,000 may seem like a big enough sum for some savers, but may seem less if they realize it translates to around $500 or $600 a month, for example.

“For the majority of Americans, this will be a wake-up call,” University of Illinois law professor Richard Kaplan said of the new revelations.

course correction

Many investors will see the disclosures for the first time on their upcoming quarterly statements, due to US Department of Labor requirements. These statements, issued by the plan administrators, will arrive in the days and weeks following June 30.

The new policy is the result of federal legislation – the Secure Act – passed in 2019.

Workers should use the estimates as a rough guide instead of gospel or as a guarantee, Kaplan said.

In technical terms, they show the approximate income you would get per month for the rest of your life if you were to purchase an annuity with your 401(k) savings at age 67.

I think it’s very helpful in helping people start thinking about results, not focusing on the big pile of money.

Philip Chao

director and chief investment officer at Experiential Wealth

There are two estimates: One for a “single life” annuity, which pays income to an individual purchaser for life. The other is for a “qualified joint and survivor annuity,” which pays income to an individual and a surviving spouse for life.

Estimates are based on your current 401(k) balance. They don’t predict, for example, how a 35-year-old’s savings will grow and how that future nest egg will translate into monthly income. As a result, their income may seem paltry at first sight.

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The illustrations also do not take into account Social Security or any savings outside of a 401(k) plan – meaning the estimate is likely to be at least a slight under-representation. They also assume that your full balance is fully “vested”, which may not be the case.

The estimates are likely to be more actionable for savers who have many years before retirement rather than those approaching retirement age, because the former have more time to course-correct, Kaplan said.

“Most of these measures are aimed at young people, this is a mid-term correction,” Kaplan said.

Rewire your thinking

Perhaps the most useful aspect of the new policy is how it helps people rethink their thinking about saving, according to Philip Chao, director and chief investment officer at Experiential Wealth, based in Cabin John, Maryland. retirement.

The typical person saves money with every paycheck without thinking about a future income goal. Instead, savers should ask themselves: How much of my previous salary do I want to replace in retirement? said Chao.

Someone who was earning $100,000 a year before taxes may decide that $70,000 or $80,000 a year in retirement would be enough to fund their lifestyle.

For the majority of Americans, this will be a wake-up call.

Richard Kaplan

law professor at the University of Illinois

Any 401(k) savings, retirement income and Social Security payments would then be aimed at replacing that amount of monthly or annual income, Chao said. This income will generally satisfy two buckets: essential expenses (like housing and food) or discretionary expenses (like vacations).

“I think it’s very helpful in helping people start thinking about the outcome and not focusing on the big pile of money,” Chao said of the new artwork. “It’s really about how much money do I need to provide myself with a sustainable income for life. What is that number?”

Without going through this rough budgeting exercise, Americans may be saving too much or too little without knowing it.

“We should save enough for what we need, not go wild,” Chao said. “But what is enough? If you don’t know what is enough, how do you know you have saved enough?”

Contrary to the new Department of Labor requirements, many plan administrators offer online resources that help 401(k) investors assess how their current account balance will fund their future income needs, taking into account certain assumptions about investment income and current contribution rates.

After receiving a “rude awakening” to the new income illustrations, savers can use their plan’s online calculator to better understand their situation and adjust their contributions if needed, Chao said.

For example, investors can save 3% of their paychecks while their employer offers a dollar-for-dollar 401(k) match of up to 4%, which means the worker is effectively leaving free money on the table. , did he declare.


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