The Lifetime Income Disclosure Act introduced by the U.S. Senate last year would require 401k plan sponsors (employers) to provide plan participants (employees) with estimates of the amount of lifetime income that would be generated by their account balances.
The intentions seem good as the information may: a) get people thinking about their retirement savings as the basis of their retirement income, and; b) provide a bit of a reality check in terms of the amount of savings required to produce reasonable levels of retirement income.
That said, I think most people would be shocked by how little income their retirement savings would produce.
The result might be a bit like opening a quarterly 401k report after the 2008 market meltdown—better to just ignore the information by giving the letter a toss than subject oneself to the shock.
Consider, for example, what a quarterly 401k statement would look like based on the median 401k account balance.
An Employee Benefit Research Institute (EBRI) study from 2010 indicates that the median 401k balance in 2009 was $59,381. Granted, median account balances have likely increased since 2009. This is the most recent year for which data is available, and EBRI is a reliable source—their survey covers 51,852 plans, 20.7 million participants and $1.21 trillion in assets.
We can use a single premium immediate annuity (SPIA) as proxy for guaranteed lifetime income. Assumptions used to generate the SPIA results are as follows:
- We assume the participant is married.
- We assume retirement at 65 years of age, so those in the table below who are younger than 65 would have a deferred annuity.
- We use current 10 year Treasury as long-term interest rate
Given these assumptions, $59,381 would product the following amounts of guaranteed lifetime income (amounts shown are per year):
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Bill Atherton replied on Permalink
Tom, a very useful metric.
Tom, a very useful metric. Hopefully this requirement for DC statement improvement will be enforced soon.
Meanwhile, you may wish to update your immediate annuity calculations - using CANNEX Financial Exchanges, Ltd's guaranteed rate survey service, the resulting rates for a 65 year old male or couple average $3800 annually or $3324 annually, quite a bit more than the amount in your article.
tom replied on Permalink
Thanks for feedback
Appreciate the feedback Bill.
Yes, the tool I use produces an actuarial value for the annuity, so no carrier margin, tax, charge for potential adverse selection, etc. Also, results were produced with very low (and current) 10 year Treasury rates @ 2 percent.
Please do send along info about Cannex rate service. I get anything that comes through the "contact us" form on the site.