By Jon Vogler, Senior Analyst, Retirement Research on Nov 13, 2018, in Retirement
Receiving periodic retirement income estimates based on account balances can help improve retirement decisions
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
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This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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Translating account balances to retirement income boosts savings by Invesco US
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