Brace Yourself

Kristine Hayes

PARTICIPANTS IN 401(K) plans will soon be getting estimates of how much income they might receive in retirement if their plan savings were spent purchasing an annuity. Under a new rule, plan providers are required to provide participants with at least two annuity estimates annually on their account statements. One would project the lifetime income from the purchase of a single-life annuity and the other from a joint-and-survivor annuity. A joint-and-survivor annuity extends payments over two lives, typically for a married couple.

I recently came across an article by CNBC that gave this example: Someone with a $125,000 balance in his or her 401(k) would receive $645 per month for life if the money was converted to a single-life annuity. If the same balance was converted to a joint-and-survivor annuity, it would provide $533 per month until the first death, and then that same amount would be paid to the surviving spouse for life. The estimates assume a retirement age of 67, typical longevity and an interest rate based on the current 10-year Treasury note yield.

The goal of providing the annuity estimates is to help 401(k) participants see if their accumulated savings can meet their desired income needs in retirement. My guess: Most people will be shocked to find out just how little income they’re estimated to receive.

The question I have is, how will people react when presented with the figures? Will it encourage them to increase their savings rate? Or will it discourage them, prompting them to throw in the towel?

Whichever the case, 401(k) account holders should start seeing the estimates sometime between this fall and fall 2022. The two estimates are required to be provided at least once a year under 2019’s SECURE Act, a federal law which modified many provisions of tax-advantaged retirement savings plans.

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