Can We Motivate Savings By Understanding Lifetime Income?
Written by Jasmin Sethi and published in Forbes.
The theory that individuals might save more if they understood how their savings turn into income is about to be tested when a new DOL final interim rule comes into effect. The DOL is requiring ERISA defined contribution (EDC) EDC -7.9% plans to show through illustrations how individual retirement portfolios translate into monthly income at retirement.
Individuals have significant difficulty in translating their investment portfolio into lifetime income — the amount of income they would have on a monthly or annual basis for the rest of their life at retirement. Such difficulty is understandable given that such a translation requires complex calculations. Indeed, various retirement calculators at sophisticated firms help individuals determine how their retirement portfolios translate into lifetime income. Purchasing annuities also help individuals determine the fixed income value of their portfolios; and that is the tool being utilized in this rule. Accessing such computations outside of financial advice requires individuals to be proactive and to seek financial advice which they often do not do until they are close to retirement.
In addition to providing individuals with information outside of financial advice, these illustrations could provide them with the routine nudge to save more in order to meet their lifetime income goals. The disclosure required by the DOL would make clear that the income is not guaranteed unless the individual purchases the annuity, so the disclosure is simply helping them to translate what income they could have if they were to purchase an annuity with the savings in their portfolio.w individual retirement portfolios translate into monthly income at retirement.
