Your Upcoming 401(k) Statement May Shock You

Understanding your 401(k) projections is key to retirement planning. (Maksim Shchur/Shutterstock)

If you have been saving for retirement using a 401(k), you may be surprised at what you see on your next statement. The new “lifetime income illustrations” could leave you very disappointed. You also may want to make some adjustments based on what you learn from the new information.

SECURE Act Provisions

In 2019, when the SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed, it required new information to be added to your regular 401(k) statements. Although the information will not be exact, it will give you an idea of how much retirement income you could receive each month, if you used your 401(k) savings to buy an annuity at age 67.

CNBC gives an example of this, suggesting that individuals with $125,000 in their 401(k) may end up only getting $500 or $600 per month after retiring. Your statement may even show a smaller amount, but it will be based on what you have in your 401(k) at the time of the report. It does not include any future money you might put into the 401(k), money from Social Security, or any other retirement sources.

Why the Illustrations Are Necessary

The U.S. Department of Labor (pdf ) felt that younger people need some enlightenment to help them better prepare for retirement. The new quarterly statements, which will arrive after June 30, should help people—particularly younger people—take a serious look at how they are preparing for their retirement years.

Everyone wants to retire smart, but to most people, the numbers in this report will be a shock.

Many people are under the impression that having a 401(k) will ensure they have a sizeable nest egg for retirement. Perhaps because they are looking at the total projected amount at retirement age, many people do not understand how this amount breaks down into monthly payments.

The new information will give you a more realistic idea of what you can expect when retirement comes. And it should help you decide if you need to put more into your retirement fund each month, to reach a more desirable goal.

If you are young, there is still time to do this.

The Shortcomings of the Report

While the new reports will provide information not included previously in your 401(k) statement, they are not a crystal ball.

One difficulty with the lifetime income illustrations is that they are based on what is in your 401(k) at the time of the report. They do not show projected amounts, nor how much you will have if you keep saving at a consistent rate.

Therefore, for young people who have many years before retirement, the new report may not be the final word in what to expect.

Breakdown for Households

When the report comes out, it will include two sets of projections. The first will be a calculation of how much an individual would receive each month from an annuity. The second illustration reveals how much the account owner and a spouse would receive.

Look at All Your Nest Egg Sources

When you calculate how much you want to have each month in retirement, you will want to consider all potential sources. If those multiple expected sources (including Social Security, pensions, and investments) add up to a sufficient amount, you may not need to increase your contributions.

How much you receive from Social Security depends on when you start receiving funds from it. The earliest you can receive benefits from Social Security is 62, but you will only receive full benefits when you reach your full retirement age (FRA). Right now, you will reach FRA somewhere between 66 and 67, depending on when you were born.

After you reach 72, Fidelity says if you are still working, you can continue to make contributions to a 401(k), if you are not taking required minimum distributions (RMDs) yet. This applies even if you are only working part-time. In this situation, you can delay your RMDs until you retire.

Your calculations need to include another change made by the SECURE Act. Before the bill took effect, retirement account owners had to start taking RMDs by age 70 1/2. The SECURE Act pushed back the age requirement to 72.

Re-evaluate Your Nest Egg

When you receive your new 401(k) statement, take some time to re-evaluate how much monthly income you will want during retirement. To reach that goal, decide how much you need to boost your retirement savings. Then be sure to use effective ways to get to your target, such as taking advantage of employer 401(k) contributions.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.