Will Your 401(k) Retirement Income be Adequate?

As the utilization of traditional pension plans fades like the setting sun, understanding the projected retirement benefits from your 401(k) is more important than ever.

There are some important questions to address to determine if your 401(k) retirement income will provide the level of income you will need to maintain your lifestyle.

How much income will I need in retirement?
This is often hard to calculate and varies from person to person. Many people need the help of a professional to estimate this based on their individual considerations. Generalizations can be misleading but some experts say that “in general” a retiree may need 75% of the income just prior to retiring so as to not have a big drop in lifestyle. In other words, if you were 66 and retiring this year with a current income of $60,000 a year, you would need $45,000 in the first year in retirement. Check your annual Social Security Estimate for the projected retirement you are expected to receive. But in this case lets estimate 30% of preretirement income, which would be $18,000 a year in this example. But where will the rest of the needed cash flow come from? If the 401(k) were the only other option you would need $27,000 the first year but in the following years you will need more based on inflation.

How much do I need to save to reach that goal?
We need to make some assumption to be able to estimate, this such as how long you will live and inflation rates. Again we have generalizations. The first is that to be pretty sure your 401(k) was never reduced to zero, it is reasonable to start withdrawing 4.5% a year from the 401(k). So for our example, the employee should have $600,000 in the 401(k). Another generalization is that you should have 20 times your salary in the plan so based on this rule of thumb there should be $1,200,000.

How much will I have if I continue doing what I am doing now?
This involves some math and some assumptions. One would start with current income, project cost of living wage increases, possible advancement wage increases, assume no lose of job, assume expected rate of return on the investments in the 401(k) and inflation rate.

What changes are needed to your plan to have adequate annual retirement income from your 401(k)?
This is a continuation of the prior step but changing some of the assumptions, which is to increase the annual contributions, decrease the expenses, work longer, get higher annual returns, or employer increases contributions.

How should I invest my 401(k) funds?
The answer should be based on several factors with the most importance being how much will you need and when will you need it. To a lesser extent your risk tolerance is a factor. This is how well you can handle the mental stress when the market goes down, as does your account balance. Your financial ability to handle the risk is a factor as well. If you had a million in your plan you could handle more risk that if you have $10,000 in your plan.

Addressing these questions may not be easy. Plan participants may need to hire a financial planner to make these determinations.

Chamberlain Financial Consultants provides employers and employees analysis to address these issues. We analyze the current plan and provide the employer options to enhance the 401(k) to make it a more efficient income-producing plan. We also work with the participant to demonstrate the impact on future account balances and projected income based on different changes. Without this type of analysis it can be difficult to assess your future retirement income from your 401(k).

About the author

Michael Chamberlain, CFP®

Hello. My name is Michael Chamberlain CFP®, the principal of Chamberlain Financial Planning and Wealth Management. Our firm is “fee-only” with offices in Sacramento, Campbell and Santa Cruz California. “Serving clients from the mountains to the sea.”

Our mission is to help clients realize their full potential today while planning for an abundant tomorrow through comprehensive financial planning and collaborative decision-making.

As an experienced investment and planning professional, I have had the privilege of being interviewed by and contributing to hundreds of articles in such publications as Money Magazine, Financial Planning Magazine, ABC.com, Forbes.com, Nerdwallet, NASDAQ.com, Yahoo Finance and more.

I hope that you spend some time at the FiGuide site and learn more about the financial matters important to you. To learn more about our firm, visit our website www.chamberlainfp.com or give us a call at 800-347-1340.

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