New 401(k) statements could confuse folks about their retirement savings

There’s a new twist to your quarterly 401(k) statement that may merit an extra look.

For the first time, 401(k) statements will feature a lifetime income illustration which shows the monthly income you would receive from your current 401(k) savings when you’re 67. In essence, it shows you roughly how much income you’d get per month for the rest of your life if you were to purchase an annuity with your current 401(k) savings at age 67.

While the mission of the snapshot illustration is an admirable one — helping you get a sense of whether your retirement stockpile is likely to last your lifetime — some experts worry these may cause additional confusion and won’t have the intended effect of nudging Americans to ramp up their savings shortcomings.

“What they’re putting out there is version 1.0. They can improve upon this in the future,” Phil Maffei, managing director of corporate retirement income products at TIAA, told Yahoo Money. “But very few people are really paying attention these days, so it doesn’t surprise me if nobody notices the feature on there.”

These illustrations have been in the works for a long time.

The new federal rule was part of the 2019 Secure Act retirement savings law and requires that by this fall all 401(k) plan administrators must at least annually show an illustration on your statement of how the money in your account would convert into an estimated lifelong monthly income stream when you’re 67, which is the Social Security full retirement age for most workers. Individual Retirement Account (IRA) managers aren’t required to do this.

Here’s what this means.

You’ll find two estimates on your statement: One is for a “single life” annuity, which pays income to an individual buyer for life. The other is for a “qualified joint and survivor” annuity, which pays income for an individual and a surviving spouse for life.

Say you’re 40 years old and have a 401(k) with $125,000, the illustration would translate that to around $500 or $600 in monthly income with these new illustrations. That could be a wake-up call if you find the monthly income to be too low.

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The cold truth is that one of the biggest worries most people have as they near retirement is will they outlive their money. With studies showing that increasingly Americans are stepping out of the workforce earlier than they anticipated, retirement planning takes on a new urgency.

The downside to the new lifetime income illustrations

But the illustrations may help only certain segments of people, experts worry.

“The projections are going to be pretty reasonable for someone who’s close to retirement,” Maffei said, “but meaningless for someone who’s 25 or 35.”

The estimate is a precise moment in time. For instance, it doesn’t take into account any new contributions you make in the future, nor does it include earnings growth over time, or future employer match contributions. And the potential impact of inflation isn’t even on the radar.

“It’s a great first start, but I do worry that for younger employees, it may disincentivize them from saving,” Maffei said. “You get this projection, which shows a very minimal amount of money. They’re not going to understand and connect the dots on why this is so low. It’s not projecting that $25,000 they now have saved forward to what could be a million dollars at age 65.”

And it’s important for 401(k) savers to remember that this calculation is one piece of your retirement income. Social Security and any retirement savings outside of your 401(k) plan are not factored into these calculations.

“On the surface, this seems like a good idea, but in the execution, this may be misleading to many 401(k) participants,” Joyce Streithorst, a certified financial planner at Frisch Financial Group, Inc. in Melville, N.Y., told Yahoo Money. “It is helpful to see the numbers showing what a lump sum amount would look like as a monthly check, but this doesn’t tell the whole story. There is so much small print explaining how the calculations were done that I’m afraid people will get confused about what the numbers represent.”

Aside from the fact that the calculations assume that you’re currently 67 (regardless of your actual age and that your spouse is the same age) and annuitizing your 401(k) right now, the interest rate being used for the estimate is the 10-year Treasury rate, which doesn’t reflect any possible equity returns.

“Possible misunderstandings include, first, ‘since my company knows my age and my spouse’s age, these projections are a representation of what I would get,’ which they are not,” Streithorst said. “Two, ‘this is my current ‘pension’ amount and it’s guaranteed.’ And, of course, that is not the case. And third, not knowing how asset allocation and market volatility can impact these numbers.”

Her verdict: “This new rule can best be helpful for someone close to age 67, where the numbers would be the closest to actual. The younger an employee is, the less reliance can be placed on these numbers, and the more misleading they may be.”

Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon

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