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You may be in for a nasty surprise when you open your next 401(k) statement.

These statements usually arrive every quarter, either online or by mail. They provide savers with basic information about the size of their investments and their nest egg, for example.

In a few weeks, the notice will include some new data: the amount of monthly income a saver will receive from their current nest egg in retirement.

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Called the “lifetime income illustration,” these calculations are part of an ongoing effort by policymakers to reshape the way Americans think about retirement savings: more like regular checks from work or Social Security, for example. for, instead of outright.

The big picture of a lump sum can tell investors very little about whether or not their total savings will adequately fund their retirement lifestyle. A $125,000 nest egg may seem like a substantial amount to some savers, but may seem low if they realize it translates to. tentative For example, $500 or $600 per month.

“For most Americans, this will be a wake-up call,” University of Illinois law professor Richard Kaplan said of the new revelations.

But there’s good news: Many people, especially those in retirement decades, have enough time to correct any shortfalls.

Lifetime income estimates provide a rough guide

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Many 401(k) savers will see the disclosure in their next quarterly statement for the first time due to the U.S. Department of Labor Requirements, Those statements released by plan administrators will come in the days and weeks after June 30.

The new policy is the result of a federal law – the SAFE Act – passed in 2019,

Kaplan said workers should use estimates instead of gospel or as a guarantee.

In technical terms, they show how much projected income you would receive per month for the rest of your life if you were to purchase an annuity with your 401(k) savings at age 67.

For most Americans, this will be a wake-up call.

Richard Kaplan

Professor of Law at the University of Illinois

There will be two estimates on your description: One is for a “single life” annuity, which pays out income for a lifetime to an individual buyer. The second is for a “qualified joint and survivor” annuity, which pays income to one person and a surviving spouse for life.

Estimates are based on your current 401(k) balance. For example, they do not project how a 35-year-old’s savings will grow and how the nest egg will translate into monthly income in the future. As a result, their income may seem low at first glance.

The pictures also don’t account for Social Security or any retirement savings outside of that 401(k) plan—which means estimates are likely to be at least a little low. They also assume that your entire balance is in full.”Implied“Which may not be the case, especially for new employees,

Kaplan said the estimate is likely to be most actionable for savers with several years to retire rather than near retirement age, because the former have more time to course-correct.

“Most of it is directed at young people, it’s a midstream reform,” Kaplan said.

Use projections to rewire your thinking

Perhaps the most useful aspect of the new policy is how it helps people reshape their thinking about retirement savings, according to Philip Chao, principal and chief investment officer at Experimental Wealth, based in Cabin John, Maryland.

The typical person saves money with each paycheck without thinking about a future income goal. Chao said savers should instead ask themselves how much of their prior salary they want to replace in retirement.

Someone who earned $100,000 a year before taxes could set aside $70,000 or $80,000 a year in retirement, which would be enough to fund their lifestyle.

I think it’s very helpful to get people to think about the outcome, not to stress over a big pile of money.

Philip Chao

Principal and Chief Investment Officer in Experimental Wealth

Chao said the goal of any 401(k) savings, pension income and Social Security payments would be to replace that monthly or annual income amount. That income will typically satisfy two buckets: essential expenses (such as housing and food) or discretionary expenses (such as vacation). Financial planners generally recommend that individuals fund those needs with guaranteed income sources such as Social Security, pensions or annuities, if possible.

Chao said of the new illustrations, “I think it’s very helpful to get people to think about the outcome, not insist on a big pile of money.” “It’s really about how much money I need to provide to provide me with a sustainable lifetime income. What is that number?”

Without going through this rough budget exercise, Americans may be saving too much or too little without knowing it.

“We should save enough for what we need, not go wild,” Chao said. “But what’s enough? If you don’t know what’s enough, how do you know you’ve saved enough?”

Contrary to the new Labor Department requirements, many plan administrators offer online resources that help 401(k) investors figure out their current investment income and take into account certain assumptions about current contribution rates. How will the account balance meet their future income needs?

Other organizations, including AARP And this American Institute of Certified Public AccountantsThey also offer free online retirement-income calculators.

Chao said that after receiving a rude awakening from the new 401(k) income illustration, savers can use an online calculator to get a better understanding of their situation and convert their contributions as needed.

For example, investors can save 3% of their paychecks while their employer offers a dollar-for-dollar 401(k) match of up to 4% — meaning the worker is effectively leaving free money on the table, They said.

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