Do you know how long your 401(k) savings will last? How much do you think it would take to retire? It's probably not, until now.
A new federal rule for 401(k) plans says the statements employees receive will need to say how the money in their accounts will translate into monthly income when the employee is older. Managers of individual retirement account don't have to do this
This fall, the rule will take effect. Some employers plan to make 401(k) statements with lifetime income illustrations available this summer, and a few 401(k) record-keepers and plan sponsors have already provided these kinds of retirement income illustrations on their own.
Terry Savage, a personal finance journalist and author, said in a recent episode of the Friends Talk Money that the new rule is a good attempt to give people an idea of what their 401(k) might be used for. You can listen to it whenever you want.
It is possible that the new projections will not impress them.
With these new illustrations, a 401(k) with $125,000 in it would translate to just $500 or $600 a month. According to a recent survey by the Transamerica Center for Retirement Studies, 42% of workers are worried about outliving their savings.
Is it a good idea to retire early?
The new rules for calculating lifetime-income illustrations for 401(k) plans are flawed.
They assume the employee won't make any future 401(k) contributions between now and age 67 and that their account balance won't grow over time with increased earnings. The illustrations don't take inflation into account when it comes to 401(k) retirement income.
The illustration might be a bit misleading. People are starting to think about lifetime income.
Krueger thinks the monthly income numbers are a useful retirement planning tool.
It feels like it will take a lot of the mystery out of how your 401(k) savings turn into a monthly stream of income for the rest of your life. She said it was a great attempt and came from the right place.
We have a retirement budget of $38,000 a year.
She spoke to a thought leader in the 401(k) and financial education world who offered caution.
The 401(k) providers can show the employees numbers that might be in the ballpark, but they will tend to have a bias towards being conservative.
The monthly income figures won't be as high as the 401(k) savings will deliver.
Krueger thought it was a wake-up call to not rely too much on this number.
At the same time, more employers are starting to allow employees to convert their 401(k)s into monthly income in retirement.
A 2020 law made it easier for employers to offer annuities as retirement options for employees with 401(k)s.
Most of your 401(k) should not be converted into monthly income. Inflation could mean that you need more money in the future just to keep up with rising costs, if you lock in a set amount of money every month.
If employees are considering annuitizing some of their 401(k)s, Krueger suggests meeting with a fiduciary financial adviser.
There are steps to take in the decade before retirement.
Some of your plan's retirement savings should be put into QLACs if your 401(k) offers them.
QLACs allow you to take a portion of your money and say, "I want to buy this now at age 65 but don't start paying me until I'm 75"
If you take some of your 401(k) as annuity immediately upon retirement, you will get a larger monthly check when money arrives.
Changes may be on the way. The Senate is considering legislation known as Secure 2.0, which was passed by the House. It would automatically enroll employees in 401(k)s if they were offered them. When the plans have auto-Enroll, contribution rates are higher.
The amount that people 62 to 64 years old could put into their 401(k) plans would be raised. Currently, people over 50 are allowed to make what are known as annual catch-up contributions of up to $6,500 more than the normal limit, but Secure 2.0 would let people 62 to 64 put in up to an extra $10,000 a year in catch-up contributions, if they can afford to do
It is hoped that it has enough support to pass.
Richard is the former Managing Editor of the site and the former Senior Web Editor of the Money and Security channels. He is the author of "How to Avoid a Mid-life Financial Crisis" and has been a personal finance editor.
NextAvenue.org gave permission for this article to be used.
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