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401(k) savers will see a ‘wake-up call’ in their next statement, says law professor. Here’s what to look for

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You may get a nasty surprise when you open your next 401(k) statement.

These statements generally arrive each quarter, either online or by mail. They provide basic information to savers about their investments and the size of their nest egg, for example.

Starting in a few weeks, the notices will contain some new data: the amount of monthly income a saver would get from their current nest egg in retirement.

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Called “lifetime income illustrations,” these calculations are part of an ongoing effort by policymakers to reframe how Americans think about retirement savings: like a regular check from work or Social Security, for example, instead of a lump sum.

The big-picture view of a lump sum may tell investors little about how their total savings will or won’t adequately fund their retirement lifestyle. A $125,000 nest egg may sound like an ample amount to some savers, but may seem less so if they realize it translates into roughly $500 or $600 a month, for example.

“For the bulk of Americans, it’ll be a wake-up call,” Richard Kaplan, a law professor at the University of Illinois, said of the new disclosures.

But there’s good news: Many people, especially those with decades to retirement, have ample time to fix any shortfalls.

Lifetime income estimates provide a rough guide

Many 401(k) savers will see the disclosures for the first time on their next quarterly statements, due to U.S. Department of Labor requirements. Those statements, issued by plan administrators, will arrive in the days and weeks after June 30.

The new policy is a 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 how much approximate income you’d get per month for the rest of your life if you were to buy an annuity with your 401(k) savings at age 67.

For the bulk of Americans, it’ll be a wake-up call.

Richard Kaplan

law professor at the University of Illinois

There will be 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.

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

The illustrations also don’t account for Social Security or any retirement savings outside of that 401(k) plan — meaning the estimate is likely to be at least a slight underrepresentation. They also assume your full balance is fully “vested,” which may not be the case, especially for newer hires.

The estimates are likely to be most actionable for savers with many years to retirement instead of those near retirement age, since the former have more time to course-correct, Kaplan said.

“Most of this is directed at younger people, with this being a midstream correction,” Kaplan said.

Use estimates to rewire your thinking

Unlike the new Labor Department requirements, many plan administrators offer online resources that help 401(k) investors gauge how their current account balances will fund their future income needs, by factoring in some assumptions about investment earnings and current contribution rates.

Other organizations, including AARP and the American Institute of Certified Public Accountants, also offer free online retirement-income calculators.

After getting a rude awakening from the new 401(k) income illustrations, savers can use an online calculator to get a better understanding of their situation and alter their contributions as needed, Chao said.

For example, investors might be saving 3% of their paychecks while their employer offers a dollar-for-dollar 401(k) match on up to 4% — meaning the worker is effectively leaving free money on the table, he said.

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