The Secure Act changed a lot about how retirement plans work in America, but one small 401(k) provision could give you a better idea of what to expect once you leave the workforce.
Lawmakers signed the Secure Act into law back in December, and one of the aims of the legislature was to provide a clearer retirement picture for Americans so they can gauge whether or not they are saving enough.
One provision included in the fairly hefty act is a law that requires employees to not only show a total balance in an employee’s 401(k) savings plan, but to also show a projected monthly income estimate from their plan based on the balance in the account.
This is huge because it takes away some of the math of retirement saving, and it can be a bit of an eye-opener to show if you are putting enough into that account to be able to support yourself later in life. Dan Keady, chief financial planning strategist at TIAA, thinks this could give people a different mindset about retirement saving.
“I think this is so important because it can convert people from thinking about creating a nest egg or ‘the number’ to thinking about replacing their paycheck,” Keady told Barron’s in a recent interview.
Don’t expect this change to show up on your next 401(k) statement, though. The Labor Department is working on providing some guidelines this year to 401(k) plan sponsors on how to go about calculating these monthly estimates. The calculations would have to take into account factors such as long-term contribution rates, investment performance and overall market growth, according to Barron’s.
Plan sponsors would have to provide an estimate for each employee if their retirement accounts were completely converted into a single-life or joint annuity under the Secure Act, but Keady warns everyone to remember it is still just an estimate of what to expect.
“There’s always a concern that someone will look at that and think it’s a set-in-stone number,” Keady said. “It’s important to look at that and know that it’s an estimate and not a guarantee.”
Howard Hook, an accountant and certified financial planner at EKS Associates, thinks this change within the Secure Act could be a huge benefit for younger workers because it provides a useful gauge to figure if they are on the right path to a healthy retirement.
And knowing how much you can safely spend from your 401(k) each month could give you and idea of how aggressive to be with your 401(k) investing strategy. A recent Fidelity study showed that 23.1% of retirement accounts managed by the firm were overexposed to equities, and while that may mean big gains now, it also means big losses when the market inevitably goes through a correction period.
Saving for retirement in America has become a more important issue as more people entire their golden years, and the Secure Act was a step in the right direction to provide some tools for individuals to have a better idea of what to expect once they leave the workforce.
