The U.S. Department of Labor now offers a tool to help employees assess their paths toward providing for their retirements. Employees who use the website to input their ages, 401(k), 403(b) or IRA balances, annual contribution amounts, and years to retirement are provided a projection of the monthly income they might expect to receive in retirement. A sample result is provided in the graphic below. For more information, click here.
The calculations include adjustments for future investment earnings and inflation. Details about the assumptions used are available by clicking the “View Instructions” link.
The tool makes a simplifying assumption that may cause employees to underestimate how much they will need at retirement. It assumes each employee will survive in retirement according to an average life expectancy (roughly age 85 to 90, depending on retirement age, gender, etc.). That may be true for half of us, but what about the other half? Relying on any tool to calculate how much we can spend in retirement may cause our retirement account balances to run out sometime around our late 80s. What happens then?
401(k) and 403(b) plans were initially designed to provide supplemental income in retirement. Over the years they have become the primary retirement plan for most employers. More and more employees are relying on their employer retirement plans for retirement security. Getting good information about the adequacy of these plans is critical.
Employees should review the assumptions behind the calculations used in retirement planning. Terms like “life expectancy,” “annuity conversion,” or “average lifetime” imply the results will be sending roughly half of the tool’s users on a path to disappointment. While these plans are not designed to provide a guaranteed income at retirement, addressing the possibility of living well into one’s 90s will help employees plan for a more secure retirement.
Milliman’s PlanAhead for Retirement® tackles this dilemma by asking this question. The input can be modified if desired, but this foresight better projects the reality that employees may face. As a result of this realization, employees may modify their saving, investing, and spending patterns to better prepare them for life in retirement.
Sample results show this impact in the graphic below.
This is one of the many assumptions that need to be considered when evaluating an employee’s benefit adequacy in retirement. We will continue to explore other aspects in this series on the subject of retirement readiness.