AARP Hearing Center
When we ponder our retirement savings, we tend to think in terms of a single number: I’ve got this many dollars socked away in my 401(k), 403(b) or IRA. But though that number may be enough to spark some reassurance or anxiety, it’s not a very useful figure on its own. What really matters, financial planners will tell you, is how much monthly income your savings can generate over your retirement life.
Until now, estimating that income stream has been on you, whether or not you can run the math to calculate it or have looked online for a tool that can do the job for you. But as a result of legislation passed in 2019 and now in effect, a little more light has been shed on that mystery. As of June, the Department of Labor, one of the overseers of workplace plans, requires your plan’s administrator to include what’s been deemed a “lifetime income illustration” in your quarterly statement. So in addition to seeing how much your account is now worth and how it is invested, you’ll be seeing an estimate of how much monthly income your account could provide to you in retirement.
“The Department of Labor wants to ensure that there is better awareness of how an account balance translates into monthly income,” explains Dennis Elliott, head of product and platforms for T. Rowe Price Retirement Plan Services.
The figure you’ll see is an estimate of what you’d receive each month if you emptied your account upon retiring and used all the funds to buy a life annuity — an insurance product that provides fixed payments for the rest of your life. The size of that monthly payment is determined not only by how much you give the insurer, but also by how old you are and how high interest rates are at the time of purchase. The older you are and the higher the rates are, the more you’ll get per month.
In fact, you’ll see two income estimates on a quarterly statement: a fixed monthly amount you could collect for the rest of your life, called a single life annuity, and a smaller sum you and your partner could receive monthly, known as a qualified joint and survivor annuity. If you died before your partner, this second type of annuity would continue to provide a fixed monthly amount to your partner for his or her lifetime.
Like any estimate, the lifetime income illustration can be misleading as well as helpful. “It’s like a beautiful cake,” says DeDe Jones, a Denver financial planner and CPA. “When you dig into the layers, you see how complicated it is.” To grasp what the numbers mean for your situation, you need to understand the assumptions that went into them.
Your age
If you’re 67 or older, the annuity’s monthly payout calculation takes into account your actual age. But if you’re 66 or younger — whether you’re 62, 52 or 42 — the calculation assumes you will begin taking payments at 67. If you start drawing down funds at an earlier age, your monthly payouts could be dramatically lower. Also note that for the joint and survivor annuity, the assumption is that your partner is exactly your age. If your partner is younger than you, the payout could be smaller; if older, the payout could be bigger.
