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Editor’s note: Last year, the Department of Labor’s Employee Benefit Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM)  about using lifetime income illustrations in defined contribution participant statements such as 401(k)s, 403(b)s, etc.  to help employees understand what their savings might provide in terms of retirement income.  Information like this can help employees choose to save more for retirement, or make more informed decisions about when to retire, take Social Security, etc.   Below you’ll find the link to a lifetime income calculator now available on the EBSA site. I highly recommend making it available to your plan participants, and including examples from the tool in your employee or client education efforts. 

The following is taken directly from an EBSA page explaining how the calculator can be used. 

Overview 

Workers participating in defined contribution plans, like 401(k) plans or similar savings plans, are responsible for managing their retirement savings while employed and during their retirement years.

Showing participants their retirement plan account balance as level monthly payments for their lifetime will help them assess their retirement readiness and plan for their retirement. As described in an advance notice of proposed rulemaking (ANPRM), the Department of Labor is considering proposing a rule that pension benefit statements include the participant’s account balance as a single sum as well as an estimated lifetime income stream of level payments using both the participant’s current account balance and the projected account balance at retirement. For married participants, the statement also must include joint and survivor lifetime income payments.

Using assumptions described in the ANPRM (noted below), this calculator illustrates an annuitization approach to estimate the monthly lifetime income streams based on both the participant’s current account balance and on the projected value of the account balance at retirement. For both balances, the calculator develops two level lifetime payments: one for the life of the participant (with no benefits to any survivors) and the second for the joint lives of the participant and the spouse with a fifty percent survivor’s benefit for the spouse’s lifetime.

This calculator uses a simplified computation (e.g., annual contributions, mid-year retirement). Depending on the comments received in response to the ANPRM, the next version of the calculator may provide a more precise computation (e.g., monthly contributions, retirement in a specified month).

How the Calculator Works 

The calculator uses the safe harbor assumptions described in the ANPRM for estimating future contributions, investment earnings, and inflation:

  • Contributions continue to Retirement Age at the Current Annual Contribution amount increased by 3 percent per year.
  • Investment returns are 7 percent per year (nominal).
  • An inflation rate of 3 percent per year is used for discounting the projected account balance to today’s dollars.

In converting the account balances into lifetime income streams, the calculator uses the safe harbor annuity conversion assumptions described in the ANPRM:

  • A rate of interest equal to the l0-year constant maturity Treasury securities rate for the first business day of the last month of the period to which the statement relates (equal to 1.63% as of December 3, 2012 for statement periods ending December 31, 2012).
  • The applicable mortality table under section 417(e)(3)(8) of the Internal Revenue Code in effect on the first day of the last month of the period to which the statement relates. This is a unisex table (i.e., the annuity values are the same for males and females).
  • No insurance company load for expenses, profit, reserves, etc.

Instructions 

All fields are required. To begin the calculation:

  1. Enter the participant’s Retirement Age. Under the ANPRM this is the normal retirement age under the plan, which is most likely age 65 but could be another age. If the participant is older than the normal retirement age, use their actual age.
  2. Next, enter the participant’s Current Account Balance. This is the participant’s account balance on the last day of the statement period on the most recent account statement provided by the plan.
  3.  Enter the participant’s Current Annual Contribution. This is the amount contributed to the participant’s account in the last year (the 12-month period ending on the statement date), including both the participant’s and the employer’s contributions. Do not include investment earnings (or losses) for the year.
  4. For the participant’s Years to Retirement, enter the number of full years until the participant will retire. This will generally equal the Retirement Age entered above minus the participant’s age next birthday. If the participant has already reached Retirement Age, enter zero. The calculator will add a half year to the full years entered to approximate an assumed mid-year retirement (on average).
  5. Enter the Statement Date. This is the last day of the statement period on the most recent account statement provided by the plan.
  6. Finally, after entering all of the information above, click Calculate to see a chart of results.

For example, to match the results in the example in the ANPRM, you would enter: (1) Retirement Age of 68; (2) Current Account Balance of $150,000; (3) Current Annual Contribution of $5,000; (4) Years to Retirement of 10; and (5) Statement Date of 01/30/2014.

The Calculation Results

The first row of results in the chart shows the Current Account Balance and the estimated monthly lifetime income payment the participant would receive today based on only the Current Account Balance (i.e., assuming no future contributions). This amount is calculated as if the participant has already reached the Retirement Age entered, even if the participant is currently much younger. For example, if the Retirement Age entered is 68, the results will show what monthly income (with no survivor benefits) a 68·year old would receive today based on the Current Account Balance. It also shows the, amount the participant and the surviving spouse would receive under a joint and survivor benefit; (with 50% of the participant’s monthly amount paid to the surviving spouse), assuming the participant and the spouse are the same age.

The second row of results illustrates the participant’s projected account balance looking ahead to the present value of what the participant will have saved by the time the participant reaches the Retirement Age. The projected account balance includes the Current Account Balance, assumed contributions from both the participant and employer between now and Retirement Age, and investment earnings on those amounts. These amounts are then discounted into today’s dollars to obtain the projected account balance. The projected account balance is then converted into the participant’s monthly lifetime income payments as well as the joint and survivor monthly lifetime benefit payments.

All of the results shown are estimates, not guarantees, of the level of the account balance or of the lifetime income streams of payments.

The Department does not monitor or save data entered online, and calculations cannot be saved online.   Results may be saved by printing a copy or copying/pasting a copy into a text document before terminating the session.

For more information visit:  http://www.dol.gov/ebsa/regs/lifetimeincomecalculator.html