Key Takeaways
- The new SECURE Act requires 401(k) plan administrators to disclose projected monthly incomes to investors.
- Previously, investors only received information regarding the lump sum of their 401(k)s.
- By understanding how the lump sum translates into monthly amounts, investors gain a clearer idea of what their retirement income will be.
There was a time when seat belts were not required by law. Eventually, that changed, and it became commonly understood and accepted that seat belts are an important safety feature in vehicles and can save lives. It’s the type of law that’s so obvious, you forget it hasn’t always been in place.
Well, the new SECURE Act, which was signed into law on December 20th, 2019, includes a mandatory lifetime income disclosure, which we may one day look back upon as we do seat belt laws. This particular disclosure requires 401(k) plan administrators to inform investors, on an annual basis, what their expected income stream will be in retirement. As an article from MarketWatch points out, understanding this may help investors more accurately plan for retirement.
Why is this important? Well, when you consider the basics, your three key elements of money are your cashflow, your taxes, and your balance sheet. Your 401(k) is tied to your balance sheet and your cashflow. And if you’re getting close to retirement, you’ll want to make sure you understand exactly how much income you’ll have once you retire, and whether you’ll be able to afford to do the things you want to do in retirement.
Of course, you may have Social Security and perhaps even a pension, but many Americans view their 401(k)s as these large, lump sums that may cause them to overestimate how much they’ll have available to them in retirement. If you think of your 401(k) as one lump sum, and if you’ve been saving for a while, it may be a pretty substantial amount of money. However, thinking about how that lump sum translates into monthly payments in retirement may reframe your thinking about whether you have enough.
Think of having this information as one more piece of the puzzle to being able to create your spending plan in retirement, which is really important. You’ll have expenses and you’ll have income, and if that income isn’t enough, you’ll now have more information to know how much you’ll need to adjust.
For more information on the SECURE Act and how it may affect you, read our blog post. Until next time, enjoy.