Take that Monthly Retirement Projection With a Grain of Salt

Say you’ve been dutifully socking away money from every paycheck for your eventual retirement so you can live reasonably well later in life.

But how do you know those years of savings are going to work out to a decent sum you can actually live on? If only there were some way to take that accumulated balance in your 401(k) and turn it into something more like a regular paycheck.

Thanks to the SECURE Act, 401(k) statements will now show you a figure called the lifetime income illustration. It’s based on turning your accumulated balance into an annuity — an insurance product that pays out a series of regular payments — and the monthly income you’d get from that annuity.

Problem is, it’s just a snapshot. “It doesn’t take into account outside savings and tries to predict an unpredictable future,” says Carolyn McCLanahan, a certified financial planner and founder of Life Planning Partners. “To me, those income statements are a waste of paper and have no bearing on real life.”

Douglas Boneparth, a CFP and president of Bone Fide Wealth, is torn. “Giving people more information regarding their financial life is generally a good thing,” he says. “It might motivate someone to save more for retirement.”

A plan needs context. “There’s so much more that goes into retirement planning [than one piece of data],” Boneparth says.

Several factors — Social Security, rate-of-return assumptions, inflation — go into proper retirement planning, Boneparth says. “This is also why there are professionals that can help.”

So take a deep breath before you look at your next 401(k) statement. If you’re under 40, remember that you have many more years to add to your retirement nest egg. If you’re closer to retirement, realize that this one statement from one account doesn’t factor in Social Security, individual retirement accounts or post-tax brokerage investment accounts.

For more, read this story from our writer, Mary Ellen Cagnassola, who explains what goes into the math.