Take Three: Lifetime Income Illustrations

Filed in Education, Retirement by on May 21, 2013 0 Comments

Phyllis C. Borzi, assistant secretary of labor for employee benefits security

On May 7, the department’s Employee Benefits Security Administration announced an advance notice of proposed rulemaking on including lifetime income illustrations in the statements workers receive from their defined contribution retirement plans, such as 401(k) and 403(b) plans. The notice gives the public an opportunity for early input into the development of regulations.

We checked in with Phyllis C. Borzi, assistant secretary of labor for employee benefits security, to help explain what lifetime income illustrations are and why they matter.

What is a lifetime income illustration?

What we mean by a lifetime income illustration is a projection, a visual indicator on a quarterly or annual retirement account statement, if you will, that would show an individual saving for retirement the likely monthly income that may be generated from his or her current account balance. The illustration could also show an expected account balance at the time of retirement based on projected contribution amounts and annual growth over a period of years, and how such a lump sum could be broken down into a stream of monthly payments for life.

Why is this important?

Unfortunately, many retirees run the risk of outliving their savings, and this initiative is intended to help America’s workers have a more secure retirement. The traditional pension plans where retirees receive monthly checks from former employers is less and less of an option for workers these days. What we’ve seen over recent decades is the move towards defined contribution plans, like 401(k) plans. Participants in such plans need to manage their own investments throughout their career, and continue to manage their nest egg when they retire. The final balance that workers will see in their account will very likely be the most money they will ever have at their disposal. For example, $300,000 might seem like a lot of money for retirement. However, when you show a worker today how that amount would be broken down into monthly payments over about 20 years, it’s an eye opener. We’re hoping a lifetime income illustration might spur better planning for the future.

Can you show us an example of a lifetime income illustration?

Yes. On our website is a calculator that will allow you to plug in your projected retirement age, current account balance, your current annual contribution amount, and the number of years until you expect to retire. It estimates the monthly lifetime income streams based on your current account balance and on the projected value of the account balance at your retirement. It’s a very useful tool that even some on my staff have said has forced them to rethink how they’re saving and investing money for the future.


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