retirement plan ridiculous statement

[dtbach]

My wife has a small accumulation in a 401K plan at her current job (she has only worked there a couple of years). She just got one of those little "personal" data sheets showing how she has done so far.

On the front page they did some summary of her account, showing the balance to be $9,893. Then they had a box that was titled "What might my monthly income be at retirement" and they showed "Your current account converted to income at retirement may be: $175.88/month (after tax)"

WHAT What planet are they on?? Geez that is only a 21.3% withdrawal rate. I guess they only expect people to live 5 years after retirement.

Now I know this is absurd, but what about the average employee that looks at this and says, "Hey, not bad"

I'm thinking of calling them on it but I really do have better things to do with my time. How could they put this kinds of nonsense in their report??

 

[karluk]

I seriously doubt that there is anything wrong with the estimate, although I agree that there should be better disclosures to prevent financially unsophisticated investors from jumping to conclusions. As I understand it, those amounts "converted to income at retirement" include assumptions that you will work until full retirement age, will make a reasonable return on your investments over that period, and will continue to contribute new money at the same rate.

So the assumptions are likely to be false for the majority of posters on this forum, but are somewhat more realistic for the average investor.

 

[dtbach]

Well of course there are all kinds of fine print stuff but not about if you work to retirement age. It was specifically about the amount shown as the current balance.

 

[foxfirev5]

The assumption may not be about working til retirement but rather an aggressive return on your current investment until retirement. Everything I get from my employer assumes that I will work until 65-67. Now that's funny.

 

[karluk]

I have an identical "Your current account converted to income at retirement may be:" box both on my quarterly statements and online. When I click on the link to the fine print, it clearly states the assumptions it is making to produce the estimate. Interestingly enough, one of the assumptions is that I will convert the balance to an annuity upon retirement at age 67. If you can't find the same disclosures on your own statement, or have additional questions, I suggest you contact the plan administrator.

This monthly income at retirement shows you how much money you may have each month during your retirement.

It is a simple calculation using your current retirement account balance, your historical contributions to your retirement account, and some generic variables and assumptions which may not be applicable to you.

This number is calculated using the same formula as the number shown on your last quarterly account statement, beginning in 2013.

For a more extensive, up-to-date and personalized retirement income projection, open the Retirement Income Control Panel. The Retirement Income Control Panel uses a more robust calculation and modeling with outside assets (if applicable) and the ability to edit some of the data.

This monthly income at retirement is a hypothetical illustration and not a projection of future values of your account. It is not intended to predict future investment results.

This illustration assumes a retirement age of 67, and a mortality age of 92, and it assumes a 25% combined federal and state income tax.
Prior to retirement, this illustration assumes a 6% annual growth rate on your investments, and a 2.5% annual inflation rate.
Upon retirement at age 67, this illustration assumes the purchase of a fixed annuity, crediting 4%.

The illustration does not reflect any charges, expenses or fees that may be associated with your Plan. The tax-deferred accumulation shown above would be reduced if these fees had been deducted.

 

[LOL!]

OK, karluk provided the missing info.

On the front page they did some summary of her account, showing the balance to be $9,893. Then they had a box that was titled "What might my monthly income be at retirement" and they showed "Your current account converted to income at retirement may be: $175.88/month (after tax)"

My spouse get the same thing, but the not-so-fine print says something like "If you leave this alone until retirement age 67, ….." and in fine print it says, "This assumes a 7% rate of return."

Of course, a Big Mac might cost $49.98 by that time, but they don't mention that.

I have also seen where they state the assumption is that one will continue to fund the 401(k) at their current amount every year until retirement. Or perhaps not at the current year every year, but with small increases each year.

Studies have shown that folks understand a monthly payout and not a big lump sum, so many 401(k) providers get an award for telling you the monthyl payout.

 

[rbmrtn]

Mine has the same, retirement age 65, 7% return, 3% inflation.

Believe this came about last from Dept. of Labor wanting this info on 401k statements

401(k) income projections are a good idea - Encore - MarketWatch

 

[growing_older]

So the idea was to give a better idea of how the savings accumulated would translate to future income, but by doing it in future dollars at full retirement age (65-67) they give a distorted and overly optimistic projection to those who are least sophisticated (exactly the people they planned to "help" by providing the projections. Sounds like it might have been a good idea, but poorly implemented by the time the committee got done defining how to do it.

 

[dtbach]

OK, karluk provided the missing info.


My spouse get the same thing, but the not-so-fine print says something like "If you leave this alone until retirement age 67, ….." and in fine print it says, "This assumes a 7% rate of return."

Of course, a Big Mac might cost $49.98 by that time, but they don't mention that.

I have also seen where they state the assumption is that one will continue to fund the 401(k) at their current amount every year until retirement. Or perhaps not at the current year every year, but with small increases each year.

Studies have shown that folks understand a monthly payout and not a big lump sum, so many 401(k) providers get an award for telling you the monthyl payout.

I read closer and this is pretty close to what it says. My bad. But then again, how many average workers read all the fine print. It makes it look like you can retire right now and get the stated amount per month. A bunch of blah blah blah and then "please see "An important message about your income at retirement" later in this statement. My wife's eyes would glaze over way before she got to this statement

 

[Ready]

If seeing the effects of many years of compounding encourages someone to continue investing in their 401K, maybe it's not such a bad thing, even if they don't understand all the math behind it.

I suppose if it leads them to think they have enough and don't need to save more, then that wouldn't be so good. But one can only do so much to protect people from themselves.

 

[Turboslacker]

Related one at my employer provides a projection of monthly from my 401k based on some assumptions. The kicker is it states that, "this may not be enough to retire on." Really? Based on what spending budget in retirement? I'm sure it's a stupid basis like 80% of current salary. Gee that must be why the link then takes me to a Financial Planer for hire.

 

[steelyman]

Financial Planer - is that like a carpenter?

 

[Newventurer]

Financial Planer - is that like a carpenter?

Ha, truth in advertising - they take a little off the top for themselves .

 

[Chuckanut]

Thankfully, the enlightened folks on this website will not fall prey to such confusion.

 

[48Fire]

Of course, a Big Mac might cost $49.98 by that time, but they don't mention that.

If you eat Big Macs that long, you may not make it to age 67

 

[Turboslacker]

Financial Planer - is that like a carpenter?

No no of course not. Carpenters have more skills.