Predictable income that covers essential expenses may improve retiree spending confidence. And that may lead to desirable retirement income outcomes. The Setting Every Community Up for Retirement Enhancement (SECURE) Act requires 401(k) plans to provide an annual Lifetime Income Disclosure to each plan participant. The disclosure illustrates what the participant’s current account balance will provide in both single and joint lifetime income streams. This information represents a unique opportunity for financial professionals to start the lifetime income conversation.
The accumulation years are about building a nest egg to produce income in retirement. This nest egg may benefit from including a plan to create lifetime income as well. While most retirees receive Social Security retirement benefits, many may need additional lifetime income to help ensure that their essential expenses are covered. Planning for lifetime income during the savings years may allow for choices in lifestyle when the retiree starts his or her income stream. Benefits include addressing the gap between what Social Security benefits will provide and essential expenses.
One of the challenging aspects of retirement income planning is to help clients understand the income value of their current or future nest eggs. A $1,000,000 nest egg may cause a retiree to feel “rich.” But at a 4% withdrawal rate, $1,000,000 produces only $40,000 per year. If the value of the account drops, the dollar amount of the 4% distribution drops as well.
The Lifetime Income Disclosure offers a once-a-year reason to review the lifetime income value of an account; that is, the amount of sustainable lifetime income the dollar amount might produce. The statement shows how much lifetime income the account will produce for an individual or couple at 67 years old. A financial professional can review the statement with the client, helping the client appreciate the dollar amount needed to support his or her desired retirement lifestyle. This is also a good time to determine if additional savings are required, including additional lifetime income.
Annuities provide several ways to offer lifetime income for those clients who need a source of supplemental income to help cover their essential expenses in retirement.
What might be a good option for a particular client will depend on that client’s circumstances. For more information on planning with annuities, visit Pacific Life’s Insights website.
The SECURE Act created the Lifetime Income Disclosure to help 401(k) plan participants better understand the income value of their plan account. Financial professionals have a deeper understanding of how and when additional lifetime income can be beneficial. Reach out to clients (and prospects) today and have the income conversation!
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