So I was reading an article on the SECURE Act and its provisions for lifetime income projections in retirement plans (https://bit.ly/grIncome) and found myself pondering its implementation. I advise over 90 retirement plans (with particular emphasis on ESG investing) across the US and am starting to see initial rollouts of income projection calculators. The rollout raises questions in my mind. Perhaps you, the readers, will share your insight and answers?
The idea behind lifetime income is a good one. Simply put, employees will see how much their 401k balance could translate into monthly income at retirement. If they desire more future monthly income amount, they can increase their retirement plan contribution rate. Alternatively or in conjunction, they might opt for more aggressive investments seeking perhaps better returns. As always, past performance is no guarantee of future results. And yes, they can also consider working longer which would allow for more contributions/ possibly more growth. The ultimate motivation behind lifetime income, I feel, is for employees to be able to “retire with dignity”™.
As I am writing this, I just concluded an account review call with an employee in one of my retirement plans. Rather than me listing my thoughts on the topic, here is the voice of the participant. As she looked at her projected lifetime income payment, she asked:
a. How is the computer system calculating my Social Security amount?
b. Given Social Security amounts are based on earnings, what wage increase is assumed?
c. How does the calculator account for outside savings and old retirement plans?
d. What is the assumed rate of return on the investments?
e. How does a spouse’s salary/ investment balance factor in?
f. How is life expectancy accounted for?
g. Can the system be tweaked to reflect a sudden inheritance?
h. How about other life events (i.e., divorce/ retiring early or later)?
i. In calculating needed income, where is the system assuming I am going to retire to?
This last point is a good one to bring up. One’s desired lifestyle can cause the definition of sufficient income to vary dramatically. For example, a global traveller might have higher income needs than someone who is comfortable staying at home. And yes, certain parts of the US are more expensive to live in than others. What assumption is the computer making about an employee’s retirement?
And how does someone even know where they might retire? If I were to use my career path (four companies and numerous jobs in the first fourteen years?!) as a proxy, I probably am not 100% where I will retire.
While retirement plan providers need to meet the mandated rollout deadlines, it is imperative that the lifetime income calculator be as robust and interactive as possible. The calculators should also be updated as technology improves.