Retirement income can come from a number of sources that include pension plans, a 401(k) account, an Individual Retirement Account (IRA), Social Security benefits, life annuity plans, returns from investments, etc. Accounts like a 401(k) are some of the most commonly used tools for retirement savings, as they are employer sponsored plans. 401(k) accounts also issue a retirement statement that holds information on your withdrawals, funds, and the remaining balance. These statements can seem a bit tedious to read, which is a primary reason why most retirees do not pay attention to them. However, understanding the components of your retirement income can allow you to plan your retirement expenses and income better. Having a clear idea of your income statement eliminates the chances of running out of funds or mismanaging your retirement corpus. It also ensures that you are always financially stable and prepared for any contingency that may come your way.
Here are some ways in which you can make more sense of your retirement income statements. But first, let’s understand what a 401(k) retirement income statement is and what it entails.
A 401(k) retirement income statement is a summary of your retirement funds. It contains details of your withdrawals, remaining balance, fees incurred, investments, etc.
A 401(k) retirement income statement may not be the same for all retirees. This is because not all companies, job profiles, and retirement plans are the same. Depending on the features of your plan, your 401(k) retirement income statement can differ from those of your peers, spouse, or fellow employees. However, broadly speaking, a 401(k) plan’s income statement can contain the following information:
Here’s what each of these component’s look like:Account summary
There are primarily 10 heads in your account summary. These are:
This section contains your personal information, such as your name, address, account number, etc. The name of your account beneficiary is also mentioned in this section. In addition to this, you can find your plan’s name and broker’s details here. Lastly, you can see the rate of return from your investments under this head.
This is a crucial part of your retirement income statement as it contains details about your investment allocation. You can see the precise percentage of asset allocation in your plan. This portion contains heads like:
There is usually a pie chart or graph depicting this information. Risk analysis
Based on your investment summary, the retirement income statement offers you a picture of your risk. This is categorized as:
This section also mentions if you are on track with your retirement goals as per your age, depending on whether you are close to your retirement or have some years left to cover up. You can assess your risk and make suitable changes to your retirement plan, in line with your current risk appetite mentioned in this section.Estimated retirement income
This section specifies your monthly retirement income. It is calculated as per your account balance for the first year of retirement, following the 4% withdrawal rule. This rule states that you can withdraw 4 of your total savings each year.
The income statement also shows projections of your income if you increase your contributions. Keep in mind that these are only estimates based on your contributions and current account balance. They can change with time as you increase or decrease your contributions or with potential gains and losses from your investments.
Now that you know the components of a 401(k) retirement income statement, here’s how you can make sense of it.
The most important things to read in your income statement are account activity, investment activity, investment performance, investment fees, investment options, and transaction details. Here’s why:Account activity
You can find the percentage of your income that you contribute to your 401(k) plan here. It also shows the percentage of the match up contribution made by your employer. Reading this will give you an idea of how much you are saving and if there is any scope to increase your contributions for a more stable retirement.Investment activity
This section shows you a detailed summary of your investments. The exact allocation of stocks, bonds, company stocks, etc., in your plan. It is presented in the form of a table that contains the opening balance, ending balance, profits and losses, as well as future allocations. If you are unsatisfied with your investments you can pick new ones from the ‘investment options’ section.Investment performance
The investment performance section denotes how your investments have fared from the day you started investing in your account. The performance of your investments is categorized as per time, such as up to 3 months, 1 year, 5 years, 10 years, and since inception. All of your retirement funds are mentioned here and their performance through the years is clearly specified, so you can see exactly how each of these funds is performing.Investment fees
The cost incurred to maintain your investments is explained in this section. It includes two sections: plan administrative expenses and total fees and expenses. It also contains the expense ratio of your investments for each retirement fund.Investment options
Investment options are options that you can choose for future investments. These are investments you can consider to put your money in, in the future.Transaction details
This is a cumulative summary of all the transactions made in your 401(k) account. Normally, you can find a list of all your contributions made during the period of the statement along with the fees incurred. At the bottom, you can see your ending balance. You can also find the number of shares bought and the price of each share. In the case of a loan, the loan amount, repayments made, etc. will also show here.
Here are some reasons why a retirement income statement is important:
Although the retirement income statement has many benefits, it can also cause some confusion.
While it is definitely helpful to glance through your retirement income statement periodically, it may not be advised to view it as a concrete proof of your retirement savings. The income statement is merely a projection or forecast of your future income that can be used as a guide. However, relying on it wholly may not be as beneficial. It helps to share these statements with your financial advisor. Moreover, it may also be advisable to keep other options open, such as investing in a life insurance plan, an IRA, mutual funds, exchange traded funds, bonds, etc.
Retirement income statements are not as complex as they seem. They offer you an insight into how and where your money is being invested. Even if you do not refer to the estimated retirement income, you can still look at the ending balance and decide for yourself if you are on the right path. Moreover, you can also consult a professional to decipher the performance of your investments.
If you need help in reading your 401(k) retirement income statement or have questions on retirement planning, you can use our free tool to contact a professional financial advisor in your area and make better retirement decisions.
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