The SECURE Act offers useful information, but only if you can understand it.
If you’re an American worker who hasn’t been living under a rock since you started earning a paycheck, you know that saving for retirement is crucial, but is much more challenging compared to participating in a defined benefit pension like those enjoyed by our grandparents’ generation.
Since then, employers have willy-nilly offloaded accumulation and investment risks onto their employees by doing away with pensions, replacing them with defined contribution plans such as 401(k), 403(b), and 457 plans.
It’s now up to you to decide how much to invest in your employer’s defined contribution plan (if it even has one), and how to allocate that investment between different investment options. Even if you’re a diligent saver and investor, and have a far-above-average $250,000 in your 401(k), do you have any idea how to assess that vs. what you’ll need to be able to retire?
Enter the so-called Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Though it hurt many middle-class (and wealthy) Americans’ ability to maximize the value of what they leave behind for their kids, the SECURE Act includes several important and positive changes, including especially, in Section 203, a new requirement that plans provide annual lifetime income projections to plan participants.
The SECURE Act’s Lifetime Income Projection Requirement and When You May See It
The SECURE Act requires defined contribution plan administrators (i.e., employers) to disclose to plan participants (i.e., to you) at least annually your “lifetime income stream,” which is how much you could expect to be paid monthly if you were to convert your plan balance to a stream of guaranteed monthly checks.
The Act requires at least two illustrations: the first assuming you’re married to a spouse the same age as you, and that the monthly checks keep coming until both of you pass; and the second, assuming the payments end upon your passing.
Why Are Both SLA and 100% QJSA Shown in the Projection?
The Department of Labor decided to showcase both the Single Life Annuity (SLA) and the 100% Qualified Joint and Survivor Annuity (QJSA) options for a good reason: to help you see the range of monthly payouts you might actually receive. The SLA example shows what your monthly benefit would look like if you chose to receive payments for your lifetime only—typically, this is the highest possible monthly income.
On the flip side, the 100% QJSA example is there to illustrate the most conservative scenario, where the monthly payments continue for as long as either you or your spouse are alive (assuming you’re the same age). This results in a lower monthly payment, since the insurance company may have to keep sending checks for a longer period. Of course, there are other variations—like a 50% QJSA—that fall somewhere between these two extremes, but the SLA and 100% QJSA are included to give you a clear sense of both the ceiling and the floor when it comes to monthly income from your plan.
What additional assumptions are made for the Qualified Joint and Survivor Annuity (QJSA) illustration?
To keep things simple (because nothing about retirement planning is ever truly simple), the QJSA lifetime income illustration comes with its own set of standardized assumptions.
- Assumed marital status: It automatically assumes that you’re married, whether or not you actually are.
- Assumed ages: The illustration doesn’t care whether your spouse is younger, older, or imaginary—it always assumes your spouse is exactly the same age as you. If you’re younger than 67, it uses age 67 for both you and your spouse as the starting point for calculating income. If you’re older than 67, both you and your spouse are assumed to be your current age.
- No adjustments for real-life details: The illustration ignores actual age differences and the sometimes comical realities of who is retiring with whom and when.
In other words, the scenario is standardized for everyone, regardless of your—or your spouse’s—actual situation. That means your own payout could look different if your life isn’t quite as tidy as the bureaucratic imagination prefers.
The Department of Labor (DOL) is responsible for providing guidance to plan administrators. This includes rules on how to generate income projections, a model of lifetime income disclosure including what it should explain, and the assumptions used to convert total accrued benefits to lifetime income streams.
How the Projection Interest Rate Stacks Up Against Real-World Investments
When it comes to calculating your Lifetime Income Illustration (LII), the Department of Labor has plan administrators use a very specific yardstick: the 10-year Constant Maturity Treasury rate, often referred to as the 10-year CMT. Think of this as the U.S. Government’s best guess of what it costs to borrow money for a decade—essentially, a relatively stable and predictable benchmark.
Now, here’s where things get interesting. The 10-year CMT is widely regarded—by folks in the life insurance and annuity business, no less—as a stand-in for the rates used to price real commercial annuities. So, for the sake of these projections, it’s a fair way to estimate how much monthly income your 401(k) or similar account could theoretically purchase if you bought an annuity.
But—big but here—this interest rate has little to do with the day-to-day reality of your retirement account’s actual investments. The mutual funds, stocks, and bonds you may hold can deliver returns that swing wildly by comparison. Markets go up, markets go down; government rates mostly plod along in their own lane. So, while the 10-year CMT offers a consistent way to run these calculations across millions of Americans, your personal investment performance could look quite different depending on your choices—and, let’s face it, luck.
In summary: The rate used for LIIs is a sort of “standard candle” for illustrating lifetime income, not a promise or forecast of your specific returns. Treat it as a yardstick, not a crystal ball.
What Interest Rate Is Used for Lifetime Income Illustrations—And Why?
To come up with these lifetime income projections, your plan uses a specific interest rate as a critical ingredient in the calculation. The Department of Labor settled on the 10-year Constant Maturity Treasury (CMT) rate as the yardstick. For example, if your benefit statement covers the second quarter of 2022, the numbers will be based on whatever the 10-year CMT rate was on the first business day of June.
Why that particular rate? According to feedback from industry groups during the DOL’s decision-making process, the 10-year CMT is widely recognized as a fair reflection of rates used by major insurance companies to price commercial annuities. In other words, it’s a decent stand-in for what you’d see if you actually tried to turn your savings into a guaranteed paycheck through a private annuity provider.
But here’s what’s important: this rate has nothing to do with how your own investments are actually performing in your 401(k)—whether you favor index funds, target-date funds, or anything else. Your real returns will almost certainly bob up and down and land somewhere quite different from this government-set benchmark. The 10-year CMT is simply a modeling assumption to standardize these income estimates.
Which Mortality Table Does the LII Use—And Why Does It Ignore Gender?
The lifetime income illustrations use the IRS’s gender-neutral mortality table outlined in IRS Code § 417(e)(3)(B). Why gender-neutral? Frankly, it’s the simplest way for plan administrators to handle projections without diving into the complexities (and potential legal headaches) of making assumptions about your gender, especially since people live longer these days and the rules keep shifting.
Keep in mind, though, that this approach is all about administrative ease, not actuarial precision—statistically, women tend to outlive men. So, while the table levels the playing field for disclosure purposes, your actual lifespan may vary (as the fine print invariably reminds us).
Legal Protections for Plan Sponsors Using Model Disclosure Language
Here’s some good news for employers worried about the prospect of angry employees wielding class-action lawsuits after seeing their “lifetime income stream” projections: the Department of Labor has created a set of official assumptions and disclosure language that plan sponsors can use, known as model language.
By sticking closely to this model language—and the specified assumptions—plan sponsors generally gain a layer of legal protection. In plain English, if you, as an employer, follow the DOL’s guidelines and use their suggested language (or something very close to it), you’ll have a solid defense if a participant complains that their actual retirement payments turn out to be less than what was projected in their annual statement. In other words, adopting these official disclosures can largely shield employers from liability tied to the accuracy of these projections.
This provision was designed to encourage transparency while also making sure that plan sponsors can actually provide meaningful estimates—without fearing a future courtroom battle if the real world, as it often does, turns out differently than the projection.
When Did the DOL’s Interim Final Rule on Lifetime Income Illustrations Take Effect?
To put this new disclosure into gear, the Department of Labor rolled out its Interim Final Rule (IFR) on September 18, 2020. However, plan sponsors weren’t required to pull the trigger immediately—the rule officially took effect one year later, giving everyone time to prepare for these new annual income illustrations.
Plan administrators will begin incorporating the lifetime income projection into participant benefit statements in 2022.
This article details what you can expect the projections to tell you, what they won’t tell you, what to do once you see them, and what to avoid doing.
Why It Matters: Annuities vs. Mutual Funds in Your Retirement Plan
To make sense of these new lifetime income projections—and to use them as a helpful tool rather than just more retirement jargon—you need to know the fundamental difference between annuities and mutual funds.
Mutual funds are investment vehicles designed to grow your savings by investing in stocks, bonds, or a mix of assets. Their value fluctuates based on market performance, and while they can provide solid long-term growth, there’s no guarantee of a fixed monthly income in retirement.
Annuities, on the other hand, are insurance products that can guarantee a steady stream of monthly income for life—or for as long as you or your spouse live (depending on the type). They trade away some growth potential in exchange for predictability and peace of mind.
Understanding these distinctions is crucial because the “lifetime income” numbers you’ll see on your statement are based on turning your account balance into an annuity-like payment stream—not the same as holding a basket of mutual funds. This knowledge lets you better interpret these projections and helps you compare your potential monthly “paycheck” in retirement to your actual spending needs, instead of getting misled by big account balances or market ups and downs.
How Is the Commencement Date for Annuity Payments Determined in Lifetime Income Illustrations?
Here’s a detail that can easily slip by: when plan administrators create your lifetime income illustrations (LIIs), they don’t assume you’ll start collecting checks at 65 or at some far-off “normal retirement age.” Instead, the calculation assumes you retire—and turn your savings into income—immediately, as of the date on your benefit statement.
For example, if your second quarter benefit statement closes on June 30, your projected monthly income is based on the idea that you cash out and buy an immediate annuity right then, using the balance as of that date. It’s a little like being told, “This is how much you’d get if you retired this very instant.”
That’s an important quirk, and it can affect how relevant those numbers are, especially if retirement is years (or decades) away for you.
What Your Lifetime Income Projection Will Tell You (and What It Won’t Tell You)
The idea behind the lifetime income projection disclosure is to illustrate for you how your balance would translate into lifetime income.
Example Scenario 1: Near Retirement with 10x the Median 401(k) Balance
To see how this might play out, let’s look at two hypothetical workers, John and Kelly.
John is a 65-year-old widower, earns $150,000 a year, and has accumulated a higher-than-average $654,000 in his 401(k) plan. Including his employer’s generous dollar-for-dollar match, he plans to add $40,000 this year to that plan, after which, he plans to retire and claim his Social Security benefit of $2500 a month.
Assuming his investment return is 4% above inflation this coming year, his final balance will be just over $720,000. Using Charles Schwab’s annuity calculator, converting the full $720,000 into an annuity would buy John monthly payments of $3796 (as of this writing). Including his Social Security benefits, he can expect just under $6300 a month, or $75,600 a year. Given that his current income, less the $20,000 he sets aside for retirement, is $130,000, he’ll replace only 58% of his pre-retirement income. That’s much less than the 80% replacement typically suggested by financial planners.
Despite having set aside more than 10 times the median amount in his 401(k) for his age cohort, John is looking at some unappealing options, including delaying his retirement or severely curtailing his plans for a comfortable retirement.
Example Scenario 2: 30-Year-Old with $0 Saved for Retirement
Kelly is 30 and single, earns a solid $80,000 a year and hasn’t started contributing to his employer’s 401(k). However, seeing a $0/month projection shakes him and he plans to maximize his 401(k) contributions to the allowed $19,600 from now until retirement, which he wants to be at age 60. His employer will also match dollar-for-dollar, but only up to $15,400 a year, so his total plan contribution will be $35,000 a year.
Assuming the same 4% inflation-adjusted annual returns, Kelly can expect just under $1,940,000 by the time he turns 60. The Schwab annuity calculator estimates that converting it all into an annuity would result in single-life monthly payments of $20,663. That $247,556 a year retirement income is more than triple his current income, and that’s before counting on any benefits from Social Security (which he’d have to wait a few years into his retirement to become eligible).
Despite having saved nothing from his first 8 years of post-college employment, Kelly can make changes now that will move him from a dismal retirement future to a very rosy one indeed!
How You Should View Your Own Lifetime Income Projections
Since you’re still in the accumulation phase, you probably think of your plan in terms of how much money you’ve set aside, your balance. As you approach retirement, that balance will (hopefully) become a very high number. Likely larger than anything you ever bought, including your home and car(s) combined!
However, it’s crucial that you also start thinking of that balance in terms of what kind of retirement it would fund. Unfortunately, even if your plan balance is double the value of your home, it may well be insufficient to fund a comfortable retirement.
That’s what the new illustrations will try to show you – what level of retirement income you can expect if you would convert your full plan balance into an annuity.
What it won’t tell you is how to accomplish such a conversion, whether converting your entire balance would be smart (likely not), or what would be the consequences of converting the full balance into an annuity (nothing left behind once the annuity stops its payments).
The projections mandated by the SECURE Act will also not tell you how things change if your spouse is much younger (or older) than you, or the impact of other sources of retirement benefits and/or income (e.g., your spouse’s income, your own and your spouse’s Social Security benefits, any rental income, part-time work, etc.).
What You Should Do Once You See Your Lifetime Income Projection (and What Not to Do)
First, expect that your projections may fall above, close to, or below the level of income you expect to need in retirement; and that if yours falls into that third category, you have time between now and when you retire to adjust your savings and improve your projections.
Oh No! My Projected Lifetime Income Is A Lot Lower Than I Expected! Now What?
First, don’t panic. Small changes made now can make a big difference in your ultimate results.
Second, revisit your budget (you have one, right?) to minimize expenses that don’t align with your values and priorities, so you can increase how much you set aside for retirement.
Third, use several calculators to get a better sense of how your personal situation changes things relative to the SECURE-Act-mandated projections. Kerry Pechter of Forbes test-drove half a dozen other calculators and reports on the pros and cons of each.
The test drive necessarily had to make a set of assumptions – a married couple with moderate risk tolerance, both aged 50 and wanting to retire at age 67; one earning $100k and the other $50k; neither has an existing pension or annuity; the higher-earning spouse already saved $150k and adds $6k/year, while the other has $75k saved and adds $4k/year.
Mr. Pechter concluded that this hypothetical couple appears to be much less prepared for retirement than he thought, but believes this may be due to the calculators assuming people will survive into their 90s. However, if it’s your own retirement at stake, would you risk assuming you’d die earlier?
Finally, consider hiring a certified financial planner (CFP) to design a financial plan for you to get from you are now to where you want to be to meet your financial goals, enjoy a comfortable retirement, and minimize the risk of outliving your retirement savings.
Woohoo! My Projected Lifetime Income Is A Lot Higher Than I Expected! Now What?
First, congratulations! You’ve worked hard and lived frugally enough to achieve what few of your colleagues managed to do.
Second, before you celebrate by redirecting your retirement plan contributions to an exotic vacation in Bali, use the same calculators recommended by Forbes’ Pechter (above) to better tailor the projections to your specific situation. Perhaps your spouse is much younger than you, and you plan to buy a joint-and-survivor annuity, in which case the monthly payments will be much less generous.
Finally, consider if increasing your retirement contributions even further wouldn’t be a wise choice, considering that none of us can accurately predict how the market will behave in the future – if there’s a major bear market right before your retirement date, you might need to scale back your retirement budget by a lot.
Questions and Answers on Lifetime Income
Q. What options do I have if I want to convert my retirement savings into an income stream? Are there options beyond an annuity?
- The easiest option is to purchase an annuity with the portion of your portfolio that you want to convert into a payment stream. There are various types of annuities, and different options as to guaranteed amounts to be paid, how long the payment stream will last, etc. Another option is to invest the money in bonds that pay a stream of interest payments. The drawback of the bond option is that once a bond reaches maturity, it stops paying interest, and you have to roll the money into another bond, which may have a lower yield. Bond’s values also fluctuate, but if held to maturity, they should return their nominal face value, which can be reinvested (or bequeathed to your kids). This assumes the bond issuer doesn’t default.
Q. Should I keep my money in my employer’s plan for a lifetime income stream option or roll it over to another provider?
- In principle, you can do either, since ERISA and the new SECURE Act include important fiduciary protections. Having said that, you could roll over into another plan, including an IRA, if you find one with higher benefits and/or lower fees.
Q. If an annuity is such a great option, why am I only hearing about it from my employer now?
- Most annuities are complicated products with high fees. Also, if you want to leave money for your kids once you pass away, you shouldn’t convert all of your retirement funds into annuities, since those stop making payments once you (or you and your spouse) pass away. A caveat to that is that if you accept lower monthly payments, you can get a guarantee of a minimum payout total, so if you die too early some of the money will go to your beneficiaries. However, experts recommend converting a portion of your portfolio into annuities, as this provides you with a retirement-income “floor,” and allows you to spend more in retirement than the 3% or so that’s currently considered a viable long-term draw from an investment portfolio.
Q. If I leave my company, can I take an annuity with me?
- Yes. The SECURE Act has provisions for rolling annuities from inside an employer’s plan to other plans, including IRAs.
Q. Do I have to wait until my employer sends my statement that includes my lifetime income projections?
- Not at all. You can use DOL’s existing calculator, which asks for (a) your retirement age, (b) your current account balance, (c) how much you add to it each year, (d) how many years until you retire, and (e) the date of your plan statement that shows the balance in (a) above.
This simplistic calculator assumes a 4% inflation-adjusted annual growth of your plan balance and converts the estimated balance into hypothetical annuity amounts. The results reported include your estimated balance at retirement, lifetime monthly income if payments stop at your death, and payments if you choose to have checks continue to be paid to your spouse, should he or she survive you, until his or her death. The calculator shows these numbers two times – if you were to retire immediately, and if you waited the number of years you stated in (d) above.
Since this is such a basic and imperfect calculator, you’d do well to go further afield and look at other offerings, such as the ones suggested by the above-mentioned Mr. Pechter.
The Bottom Line
The SECURE Act enacted a host of changes affecting retirement and estate planning. Some of these hurt American workers, others are expected to help. The Lifetime Income Projection mandate can help you get a sense of what you can expect from your retirement plan balance once you retire and start drawing money instead of adding to the plan.
These projections will likely shock many Americans who over-estimate what they can expect to spend in retirement. However, this is not necessarily a bad thing, as these workers can make changes now that will make their future retirement more comfortable than what staying their current course would allow.
Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. Before making major financial decisions, please speak with us or another qualified professional for guidance. The original version of this article first appeared on Wealthtender written by Opher Ganel.