If you’ve noticed lately, the thinking around retirement has moved away from ‘what’s my number?’ to ‘what do I get from that number?’
The realities of retirement have been changing over the last decade. Fewer retirees can depend upon pensions and the income that they provide. Social security considerations for inflation have nearly vanished. A focus on an overall “retirement account value”, or “number,”, along with recent market fluctuations have caused many potential retirees to reconsider their exact retirement date as they watch their “number” take them on a roller coaster ride.
Investors recognize that planning and saving for retirement will necessitate riding the wave of these fluctuations. With an inability to plan on what the exact number of their retirement nest egg will be, retirees have become more concerned about ensuring a level of income in retirement. They want to know if they can maintain, recreate and protect their current lifestyle in retirement. Many are looking to their retirement accounts not only as a nest egg, but as a way to recreate a paycheck in retirement.
The increased use of annuities by pre-retirees with guaranteed income levels is an example of this trend. Investors have begun flocking to retirement-based annuity products that advertise and market a product’s income levels rather than the growth potential of the investment. This trend further shows that the focus for pre-retirees and retirees is now primarily on retirement income, not solely on the size of their retirement account.
This trend has not been lost on investment companies as many more products are being positioned for their income producing benefits. We’re also seeing an increased focus by advisors on the income side of a retired or pre-retired client’s ledger rather than solely focusing on the asset side (I believe that if you’re near retirement and your advisor is not focusing on retirement income and remains solely focused on the growth of your portfolio, you need to begin the discussion or seek other advice).
What’s also interesting is that this trend has caught the attention of even the US Government and they’re now recognizing that identifying potential retirement income should be the focus for those considering and planning for retirement.
The Lifetime Income Disclosure Act was introduced in 2013 to address this trend and seeks to provide a way for those planning for retirement to gain a handle on what their income will be in retirement, in addition to what their potential asset level will be.
The Department of Labor provided guidance on what this may look like and what would be included on a participant’s or beneficiary’s benefit statement. Their intent is to provide on the benefit statement the account balance value (as of the last day of the statement period), a projected account balance at retirement, along with lifetime income illustrations.
Now if you’re like me, you get a bit skeptical when you hear terms like “projected” values and “illustrations.” So let’s take a look at what goes into these items.
The “projected” account value is based upon normal retirement age, which means that if a participant has not reached that age (as many 401k participants haven’t), according to the DOL brief, the participant’s current account balance would be projected to normal retirement age (defined by the Social Security Administration, as between age 65-67, depending on year of birth), based on assumed future contributions and investment returns. The projected account balance would be converted to an estimated lifetime income stream of payments, assuming that the person retires at normal retirement age.
To better understand what this all means and potentially could look like, I recommend that you visit the interactive calculator the DOL has built to compute lifetime income streams in retirement in line with this proposal.
None of this has yet been put into law, and there are of course, those who feel that incorporating this into current plans may create a “hardship” for the providers who will need to integrate this into their systems and reporting mechanisms. With this being said, the reality is that those in the financial services industry are currently moving forward and planning on ways to incorporate income illustrations into the plan reporting for their defined contribution plans.
I think that’s a good thing. By the time this makes its way onto participants’ statements, I hope that providers and regulators will have effectively worked to simplify what information will be presented and refine the “reasonableness” of the projections used.
The simple fact that the industry and regulators are moving towards this indicates the importance that planning for retirement income is taking for those planning on retirement that contribute and invest in good faith, their hard owned money each paycheck, most with little indication of what they will receive when they finally do retire.
This focus on retirement income rather than a singular focus on “the number”, “nest egg” or “account value” is a trend that will help many to plan more effectively for living in retirement.
As a friend in the industry said to me the other day, this trend indicates that the financial industry and those planning for retirement now understand that “income is the new black.”
Do you think 401(k) income projections are a good idea?