What is your savings worth?
Saving for retirement may seem simple: put money aside for later. Yet, how do you know you are on track?
401(k) benefit statements provide plan participants with their current account balance. According to Fidelity Investments, the average 401(k) balance at the end of 2019 was $112,300. For many, that may seem like a lot of money. But is it?
On average, Americans can expect to spend 20 years or more in retirement. With life expectancy improving, retirements may get even longer. Yet no one knows how long they’ll need to live off their savings.
Enter the SECURE Act, which Congress passed and President Trump signed in December. Under SECURE, you’ll soon see your 401(k) account balance expressed as estimated monthly annuity payments. Like a pension plan or Social Security, annuities provide monthly income you won’t outlive. Together with your Social Security statement, an illustration of what your account is worth as retirement income should help you evaluate whether you are on track to have the income you’ll need in retirement.
Academic research has shown that the way information is presented can affect the decision-making process. Presenting only an account balance to 401(k) savers can lead to a wealth illusion.
$112,300 may seem like a lot of money. But, when you learn it’s worth roughly $540 a month if you retired today at age 65, and when you consider what you’ll get from Social Security, is it really a lot of money? Soon you’ll see the information you need at least annually on your benefit statement to help you figure this out.
The Department of Labor has been tasked with issuing a rule by this December with assumptions for 401(k) plan sponsors to use to illustrate account balances as a single and joint and survivor annuity. So, you should see this new information on your 2021 end-of-year benefit statement. In the meantime, you can go to the Department of Labor’s Lifetime Income Calculator to get a sense of the value of your current savings as lifetime income and see if you are on track today.
Jim Szostek is Vice President & Deputy, Retirement Security at the American Council of Life Insurers (ACLI). He helps guide ACLI policy on legislation and regulations affecting the U.S. retirement system. Prior to joining ACLI in 2008, he held positions at CIGNA and The Hartford.
