As we plod our way through the headwinds of this inflationary storm, it’s important that you don’t decrease the contributions into your employer sponsored retirement program. So far this year, the investment turbulence has made it difficult to look at your statements. Even though you’re contributing every pay period, your account values are not increasing. It’s disheartening.
Your statements will soon show something new, as required by the Secure Act of 2019. The new mandate is a projection that shows how much income you can expect at age 67 based on the current value of your nest egg.
In general, I think this is a good idea with a well-intended message. But I wish the reports would drill down a little bit deeper to provide a more comprehensive forecast.
For example, let’s say you’re now 50 with a current account balance of $100,000. The calculation would show the value of your nest egg at 67, but without considering any growth of the $100,000. From that somewhat unrealistic number, they would project a monthly income.
I think the idea of translating account value to income is good. But there are some concerns that I think should be addressed to reflect a clearer picture.
That’s because the projection wouldn’t show any growth of the funds between now and age 67. What’s more, they don’t factor in that you will continue to make contributions into your retirement program. In the example above, I think it would be beneficial to project 17 more years of contributions along with some modest growth.
Before you retire, Social Security sends statements that show income projections at age 62, full retirement and age 70. If private sector retirement programs did something similar, I think it would give people a better understanding of when they’re financially able to retire.
This is a well-intended change, but I think it falls short of helping people truly understand how large a nest egg they’ll actually need to generate substantial retirement income.
Keep in mind that when you retire, you still have to pay income tax when you make a withdrawal from your nest egg. The only exception is if you have a Roth 401(k).
How much will that affect you? Well, if you were to get $500 per month in retirement income, you would only net about $400. Uncle Sam would get the other $100. Retirement does not exempt you from paying income tax and probably never will.
Generating reliable and predictable income from your nest egg is the key to retirement success. Based on my experience, people tend to underestimate how much they’ll need in retirement to maintain a comfortable lifestyle.
They often claim that they see themselves spending less in retirement. But they may be overlooking the possibility of creeping or even runaway inflation. Also, as people get deeper into their retirement years, they tend to have expenses that they didn’t anticipate. Have you noticed all the retirement communities opening up across the landscape? Have you noticed how much they cost?
Nobody knows for certain what the future will bring. But life without a paycheck, also known as retirement, is expensive. While in the labor force, make it a goal to build a sizeable nest egg, but realize that converting it into income can be a challenge.
Email your questions to ken@lifetimeplanning.com
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Society for Lifetime Planning is not affiliated with Kestra IS or Kestra AS. https://ift.tt/RKVC3q7
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.
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