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Something New on Your 401k Statements

By Roberta L Nestor

The timing of this information is probably not very good.  If you have a 401k plan, more than likely, you will not be in a hurry to open up your June 30th statement, or any investment statement.  It hurts to see the losses on your statements, even if it is “only on paper.”  Back in December 2019, Congress passed the SECURE ACT and now requires all 401(k) and 403(b) statements to include illustrations of the monthly payments you would receive if your current plan account balance was used to purchase an annuity.

Congress intended that employees will see the illustration and perhaps realize that their accumulated balance many not produce a high enough monthly income to last their lifetime.  This, in turn, will persuade workers to increase their retirement plan savings rate.  This new disclosure (effective 06/30/2022) should help employees determine their readiness to retire.  It is also expected to encourage employees to consider annuitization of some, or all, of their retirement assets.

First, let’s take a step back and understand the word annuity and annuitization.  Fixed, guaranteed annuities represent a contract with an insurance company that allows purchasers to convert all, or a portion of their retirement savings into a predictable lifetime income stream.  Think of winning the lottery – do you want to take the lump sum (i.e., your 401k balance) and manage the income stream yourself?  Or would you want to have a guaranteed income for the rest of your life?

The statement must show two kinds of annuity payouts:  a single life annuity and a joint and survivor annuity.  The illustrations will be based on your account balance as of the statement date (again, with the down markets, these projections might not look great).  If you are under age 67, the projection will assume annuity payments to start at age 67.  If you are over age 67, the illustration assumes you will begin payments right away.

These illustrations do not assume any future contributions between your actual age and age 67.  This is a problem.  If you are in your 40s, these examples may seriously underestimate the “annuity value” of your 401(k) savings.  Also, keep in mind that these projections will not include any social security benefits.

With substantially lowered account values due to current markets, the omission of future contributions and the assumptions of utilizing current annuity payout rates (which are still historically low because of interest rates), it is likely you will be unhappy with the payout illustration.  It will not help you project the amount of savings you might accumulate by the time you retire, nor will it give you a realistic figure on how much income you may be able to generate from those savings.

While it is important to know if you are on track for your retirement, it is equally important to look at all potential sources of income.  That includes social security, income from your investments outside of your workplace, Roths, or any rollovers – they are all part of the big picture.  If you are one of the brave souls who will actually open this quarter’s statements, share it with your financial advisor.  Understand what these illustrations mean and what they do not.

Roberta L. Nestor is a financial advisor practicing at 759 Boston Post Road in Milford, CT offering retirement, long term care, investment, and tax planning services.  She offers securities and advisory services as a Registered Representative and Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser.  Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth.  Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice.  You should consult a legal or tax professional regarding your individual situation.  Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

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