Savers Need a Projection of Their Full Retirement Income

Retirement

Individuals need better information to know how much to save for retirement. A good place to start is to provide them with a projection of their total retirement income that includes the monthly income they can reasonably expect from their retirement savings and their Social Security benefits. This combined estimate needs to be on one statement.

Fifty-nine percent of U.S. savers in one poll reported being very or moderately afraid that they will not have enough money in retirement. That makes it their biggest financial worry. Better information would help Americans know if those fears are justified.

Employees want this type of information and would act on it. Over 80 percent of retirement savers say that employers could encourage them to save more by providing projections of their retirement income. Both older and young employees find such a feature extremely or very important.

Unfortunately, most 401(k) statements and virtually all IRA statements that do include retirement income projections only give savers half of the picture. They may estimate how much income the worker could expect from their savings, but most don’t include how much they could receive from Social Security. The saver is left to guess how much that would be in order to fully estimate what their total retirement income may be.

Some 401(k) providers already simulate Social Security benefits and provide this information to account owners, but these providers lack the income and work history data to make a truly accurate projection. IRA statements almost never include such a projection.

Collaboration between SSA and 401(k) and IRA providers would enable savers to receive combined estimates of their Social Security benefits, using information provided by SSA, and the annuitized value of retirement savings balances. The information could be included on either an annual statement in the case of IRAs or on the 401(k) quarterly statement issued closest to the account owner’s birthday. It could also include a reminder to factor in additional accounts, if any. Initially individuals could opt into receiving SSA data on their 401(k) statement using a paper or online form. Eventually, however, it could be provided using an opt-out system. This should preserve individual choice and satisfy persons especially concerned about privacy.

Data security is another concern. Financial providers already go to great lengths to protect the confidential data in their customer statements. To assuage concerns about the data from SSA, Social Security data could be included on a 401(k) or IRA statement only if the administrators meet certain SSA-developed privacy standards.

To ensure accuracy and consistency, annuitized savings balances and SSA projections would need to use compatible methodologies so the monthly income estimates can be combined. These statements would be even more useful to savers if they included projected Social Security benefits plus projections of future balances if the account owner continues to save at the current level and how much if the individual increases the percentage of salary saved.

Income projections give savers realistic expectations and help them determine if they need to save more. A projection of their full retirement income would be even more useful.

 

Photo: iStock

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