Create Your Own Super Account Statement

We’ve all heard the expression, “too much information,” but 401k account statements generally suffer from the opposite problem, “not enough information.” This lack of information can lull savers into a false sense of security, or cause them to make bad investment decisions based on panic.

When you open that statement, you’re generally given just your account balance and the quarterly gain or loss. The problem with the account balance is a quirk of psychology that causes us to overestimate the buying power of a lump sum by a factor of 2.5. So $100,000 might seem it could purchase $250,000 worth of stuff. Now, $100,000 is a lot of money, if you’re buying a car or a condo. But when it comes to retirement, $100,000 only translates into $333 a month, based on a 4 percent annual withdrawal rate.

And a quarterly gain or loss figure is especially harmful if your investments took a hit in the previous three months. That loss number can trigger a “loss aversion” response. We hate to lose money, and we might either seek to stop the pain of loss by transferring out money to a nice, safe money market account, or pile funds into risky investments to make up for the loss. In both cases, we’re straying from a smart, diversified portfolio that will minimize volatility while guaranteeing a good rate of growth, over time.

The Department of Labor realizes that account statements are not designed to encourage saving enough, and may cause bad investment decisions. They’re working up guidelines that should help savers, and should make their way onto account statements eventually.

Among their proposals are account statements show a projected account balance at normal retirement age, and two “lifetime income illustrations.” The first of these would show what your monthly income would be based on today’s account balance, and the second would show monthly income based on your projected account balance.

So, for example, if you’re 40 years old, make $60,000 a year and have $40,000 in your 401k, your account statement might show that your $40,000 will grow to $223,000 at age 65 assuming a 7 percent average annual return.  If you add your annual contribution rate, say 3 percent of your annual income, the statement would show a balance at retirement of $303,000.

But again, we tend to overestimate the size of a lump sum. As a rule of thumb, you can assume a 4 percent annual withdrawal rate from your nest egg, and on a monthly basis that translates to $743 in the first case, and $1,010 in the second.

If those numbers aren’t making you feel very good about your retirement, it may spur you to save more and/or meet with a financial counselor to reconsider your investment strategy.

While these changes, and changes like them, are still on the drawing board at the Department of Labor, you can take advantage of them now. Get your last account statement and find a financial calculator online. I like the one at ( ) because it automatically calculates your monthly income before and after inflation is taken into account. Input your numbers and write down the results—projected account balance, lifetime income as monthly amounts—on the bottom of your latest 401k statement.

If you’re not happy with the numbers, take action when you get back to the office and increase your savings amout. Here’s another tip: Don’t put that account statement away where you can’t see it. That’s an invitation for inertia to take over and you won’t make the necessary changes. Post it to the fridge, or fold it up and put it in your purse or wallet.

It will serve as a constant reminder that you need to take action.

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