What the New “Retirement Income” Number on Your 401(k) Means
Sometime soon, you might notice a new “retirement income” number showing up on your retirement account statements, such as your 401(k) or other employer-sponsored plans. This number marks an important change that bears a more in-depth look so you can understand how it may affect your retirement plans.
This retirement income number, which could also appear as “lifetime income” or a similar term, stems from the Setting Every Community Up For Retirement Enhancement (SECURE) Act.
One of the main changes of the SECURE Act, which President Trump signed into law at the end of 2019, was an easing of rules around annuities. As a result, these insurance products may become more prevalent in 401(k)s and other retirement benefit plans.
A provision of the SECURE Act requires plan providers to include a retirement income number on statements to show participants what their lifetime income might be if they buy an annuity with their retirement savings.
However, rules from the Department of Labor on how this retirement income number should be calculated might not be finalized until the end of this year, if not later given that the coronavirus pandemic and economic impact could cause delays.
Don’t Take Retirement Income Projections at Face Value
Getting a sense of your projected retirement income can be a useful exercise to help determine whether you’re saving enough and what your retirement lifestyle might look like. However, it’s important to note that insurance companies might use the projections to make annuities seem more beneficial than they are.
For example, an article in Barron’s looks into how one such projection shows a higher lifetime income amount gained by converting to an annuity than by withdrawing from a 401(k). As the article notes, a lot depends on the assumptions made to calculate these figures, such as life expectancy and investment return. And other important considerations, such as a delayed start to Social Security, were omitted in the example given.
How to Approach Retirement Income Projections
As with any statistical model, if the inputs are flawed, the outputs will be flawed. Once retirement income projections do start to show up on your 401(k) or other retirement plan statements, it’s essential to understand how those numbers were calculated.
You may also want to share the projections with a fiduciary financial advisor who can analyze the numbers and asses how they compare with other strategies to optimize your retirement income.
For example, annuities purchased with pre-tax dollars will be taxed. You might be able to save tax dollars with certain withdrawal strategies from your 401(k), such as taking out more in low-tax years and less in high-tax ones, or offsetting profits with capital gains losses.
Still, a look at your retirement income projection could give you a sense of whether you’re on the right track for retirement, and from there, you could choose the optimal strategy for your situation.
As an independent fee-only, fiduciary financial planner in Roseville, CA, we would consider our clients’ retirement income projections as part of their overall financial picture, and we recommend that you do the same.
Schedule a complimentary, 15-minute call with a fee-only financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.