Translating account balances to retirement income boosts savings

Receiving periodic retirement income estimates based on account balances can help improve retirement decisions

Translating account balances to retirement income boosts savings

Jon VoglerTime to read: 2 min

LIMRA Secure Retirement Institute research shows that 52% of workers surveyed say it is difficult to know how retirement savings will eventually translate into monthly income. The findings suggest that offering retirement income estimates to employees can help bridge this knowledge gap and help spur increased saving. 

More information leads to more confidence and savings

After receiving their retirement income estimate, nearly half (48%) of workers in the study increased their retirement savings rate. This could have the greatest impact on the retirement security of younger workers, as they have more time to accrue savings. The research found that 55% of millennials increased their retirement savings after seeing their estimated retirement income.

Speaking of generations, baby boomers are more likely to have received retirement income estimates than Gen X or millennials. According to LIMRA, boomers would much rather view these figures in actual dollar amounts, rather than as a percentage of pre-retirement income. Since this group is closer to retirement than younger generations, they may have a better grasp of the expenses expected after leaving the workforce.

Understanding how retirement savings translates into retirement income also boosts workers’ confidence in their retirement. Among those who received an estimate of what their income would be in retirement, nearly 7 in 10 were confident they would live the retirement lifestyle they desired and that they were saving enough to live comfortably. Conversely, only 3 in 10 workers who didn’t receive this kind of estimate were confident in their retirement security.

LIMRA favors adding income estimates to investor communications

To help workers prepare for retirement, LIMRA suggests that financial professionals assist with promoting income estimates in addition to overall savings totals.

Some service providers already include lifetime income disclosures on participant statements, although there is currently no requirement to do so. While the bipartisan Retirement Enhancement and Savings Act includes a provision to require lifetime income disclosures, the retirement component of the “Tax Reform 2.0” legislation (the Family Savings Act) recently passed by the House does not.

Some experts contend that in order to help participants determine whether they are on course to have a financially secure retirement, projections of retirement income and a personalized “gap analysis” are both needed. A projection of retirement income would tell a participant how much their current behavior — including account balance and deferral rate — will provide as retirement income. A gap analysis for a participant would provide:

  • A benchmark for retirement adequacy (for example, a 70% income replacement ratio)
  • An assessment of the current level (in percentage terms) of projected income
  • A calculation of a deferral increase (to close the gap) if the projection is lower than the benchmark

If provided with retirement income projections and gap analyses (updated annually), we believe participants are likely to have better investment outcomes, because they will be empowered to make better-informed decisions on topics such as deferral rates, risk versus return comparisons and retirement ages.

 

Sources:

NAPA Net, “Retirement income estimates can help boost savings, study finds,” Ted Godbout, Oct. 1, 2018

Ignites, “52% of workers say monthly retirement income is a puzzle,” Beagan Wilcox Volz, Sept. 28, 2018

PlanSponsor, “Translating account balances to monthly retirement income helps participants,” Rebecca Moore, Sept. 27, 2018

Drinker Biddle & Reath, “Best practices for plan sponsors: projection of retirement income,” Fred Reish, Sept. 26, 2018

Important information

Blog header image: Christian Chan/Shutterstock.com

Jon Vogler

Senior Analyst Retirement Research, Invesco Consulting

Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.

Prior to joining Invesco in 2008, Mr. Vogler spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.

Mr. Vogler earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He earned a BA degree in history from Rutgers, The State University of New Jersey.

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