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The Magic Number

Congratulations! You’ve had a long, successful career and you’re on the brink of retirement. This being 2019, you have no defined benefit pension which will guarantee you a set paycheck for the rest of your days. Instead, you have a healthy balance in your 401(k), thanks to your patience and discipline.

Take a look at that balance statement. If you’re one of the (really) lucky ones, you’ve got a million dollars to fund a retirement that could stretch for decades. What does that translate into when it comes down to your monthly budget once you’ve retired? Hard to say, really. And what if you’re more like the average 60 to 69-year-old? Then the total is closer to $195,500. Try dividing that by a lifetime, should such a calculator exist.

Call it the Magic Number, if you will, because monthly income is crucial. We know this because the world of retirement once had it as the central premise. Social Security, despite its uncertain future, operates as a benefit based on guaranteed income. Remember the good old days of the defined benefit pension? Those plans expressed income as a percentage of your final working salary.

But times have changed. Employers are increasingly shifting responsibility onto employees to fund and manage their own retirement portfolios. Now you have to do the math. And if you get it wrong, you risk outliving your savings. 

Is Help On The Way?

So it’s welcome news that the US government is trying to prepare Americans for retirement and provide a framework for understanding what retirement savings mean on a practical level. In late May, the House passed in a landslide (417-3) the Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act. With broad bipartisan support, odds are high that the bill will eventually be signed into law. The SECURE Act has gotten overwhelmingly good feedback from experts and economists. With good reason- there’s a lot to like. 

But the media has, by and large, ignored one crucial provision of the SECURE Act. And when that provision has been flagged in the press, it’s done so with deep and misleading suspicion. That’s Section 203, the lifetime income disclosure mandate. This provision requires employers to disclose on benefit statements what the total account balance would look like if it were translated into a lifetime income stream. By contrast, today’s 401(k) statements detail investment returns and account value. As a result, employees may mistakenly believe that the grand total- more money than many have seen in their lives- is a pot of gold that will be sufficient in retirement. They become overconfident and fail to calculate what the bottom line translates into over the course of a lifetime.

This isn’t conjectured on my part. The majority of Americans are unaware of their income needs in retirement, according to studies like this one from Northwestern Mutual. They simply haven’t done the math. Then there’s what some call the intention-action gap. It’s the disconnect between what well-meaning people know they should be doing and what they actually end up doing. For instance, many report that they should be saving approximately 25.3% of their disposable personal income to prepare for retirement. How much are they actually saving? Just 5.5%. 

All of these trends add up to a disturbing big picture.

“Americans think there’s a 45% chance that they’ll outlive their savings. 41% have taken no steps to address it.”

Source- Northwestern Mutual 2019 Planning & Progress Study

A Wake-Up Call

What’s the “right” wake up call? Critics of Section 203 don’t have an answer. I say the lifetime income disclosure is an excellent start. 

If you look again at the world of Social Security, we have some confirmation. In 2011, the Social Security Administration (SSA) took a break from mailing benefit statements. In 2014, they reintroduced mailed participant statements, staggered by every fifth birth year. A RAND study from 2017 measured the effect of the reinstatement. Once workers began receiving personalized knowledge about their expected Social Security income, they reported changing their expectations of benefits and in a number of instances, they chose to return to the workforce. All this from a black-and-white statement of monthly income.

Say whatever else you will about the SECURE Act, but Section 203 deserves singling out as a critical feature. The Magic Number is the one that tells us monthly income. It makes Americans less likely to stay dangerously in the dark about their financial health in retirement. Almost every study confirms what we already know to be true: there’s a real retirement crisis that is only set to get worse. At this point, Americans need every financial literacy tool that we can get.