Why Your 401(k) Statement Shows a Monthly 'Paycheck' — and Why the Number Can Feel So Small
The SECURE Act of 2019 made a change to 401(k) statements, requiring that the documents now show how your 401(k) will translate into projected monthly retirement paychecks.
This detail can make a six-figure balance look underwhelming when converted into income that is supposed to fund your retirement. The Department of Labor uses conservative estimates, which make the number smaller than anticipated.
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Why 401(k) statements include a monthly income number
The monthly income number serves as a “lifetime income illustration” that is intended to help people prepare for retirement. It shows up on 401(k) statements at least once per year, and illustrates how your current balance translates into a monthly income stretched over your retirement.
The Labor Department's fact sheet explains that the monthly income number assumes you convert your entire 401(k) into a single life annuity and a qualified joint and survivor annuity.
You do not have to buy annuities because the illustrations in your statement use them as examples. You can stick with stocks, bonds or any type of investments that are eligible for a 401(k) plan.
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Why the number can look small
The Labor Department’s illustrations assume that payments begin at 67. Essentially, if you are a 30-year-old who has plenty of high-earning years ahead of you, this illustration will not account for those potential future earnings.
You still have to spread the money over many years, so the monthly figure will naturally be much smaller than your 401(k) balance. However, the fact that annuities are used in the simulation doesn’t consider how much the value of equities can grow over time.
Annuities typically don’t have as much growth potential and trail stocks during bullish economic cycles. The numbers in the illustrations are generally conservative, and you can get more mileage out of assets that let you incur more risk.
How to use the estimate
The monthly paycheck number can serve as a reality check that assumes low-risk investments in retirement. It may show that you are not ready for retirement quite yet, which makes sense if you’re early in your career.
Some people in their 50s may be nervous about their number, but there’s no reason to panic. That monthly number does not factor in other income sources, such as Social Security, pensions, individual retirement accounts (IRAs) and spousal income. It also doesn’t consider your monthly retirement expenses, which may be lower than your retirement income sources.
Some people may need to ramp up their investing to catch up, but it doesn’t have to happen overnight. You can start by raising your contributions by one percentage point and capturing the full employer match. Trimming expenses if possible, avoiding unnecessary withdrawals and reviewing your investment choices can also get you closer to long-term financial goals. You can also take action by working longer and building investments while picking up a side hustle.