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Ways You Can Make More Sense of Retirement Income Statements

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.

What is a 401(k) retirement income statement?

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.

What are the basic components of a retirement income statement?

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:

  • A summary of your funds
  • Basic details like your name, account number, age, returns, beneficiary information, etc./li>
  • A summary of your investments
  • A risk analysis of your retirement account/li>
  • Estimated retirement income

Here’s what each of these component’s look like:

Account summary

There are primarily 10 heads in your account summary. These are:

  • Opening balance: This is the opening balance or the amount of money you had in your 401(k) account at the beginning of the year.

  • Contributions made by the account holder: This refers to the total amount of contributions that you have made to your 401(k) account. The contribution limits are fixed for each year and can change every year. The contribution limits for 2021 are fixed at $19,500. Employees aged 50 or more can also make an additional catch-up contribution of $6,500.

  • Contributions made by the employer: This is the amount of money that your employer contributes to your 401(k) plan. For the year 2021, the general limit for total contributions made by the employer and the employee is $58,000. For employees aged 50 and more, the limit is increased to $64,500, after adding the $6,500 catch-up contribution amount. Generally, employers match their employees’ contributions up to a dollar or 50 cents of each dollar contributed by the employee.

  • Withdrawals made: Any distributions made by you during the period of the statement will show up in this section.

  • Fees incurred: This refers to the cost of maintenance of your 401(k) account. This is a sum of investment fees, administrative costs, fiduciary and consulting charges. On average, your 401(k) fees can amount to 1% to 2% of your plan’s assets or your total account balance. The investment fees are incurred by the employees. However, some employers may offer to cover the administrative costs and fiduciary and consulting charges. But this can differ from employer to employer. In some cases, all the costs are covered by the employee.

  • Gains earned or losses incurred: These refer to the gains you have earned on your investments or any losses that you may have suffered from.

  • Ending balance: The ending balance is the net worth of your funds. This includes your contributions, your employer’s contributions, and the gains you have earned, minus the fees and losses incurred.

  • Vesting balance: The vesting balance may be the same as the ending balance. This refers to the amount of money you are eligible to keep with you if you quit your job and move to another employer. In addition to this, the vested balance is the balance from which you can take a loan, if needed.

  • Loan balance: If you have taken a loan from your 401(k) account, the amount will reflect in this section. It also contains details of repayments made as well as the outstanding balance.

  • Loan repayments: All loan repayments made during the period of the income statement will show up in this section.

  • Basic details

    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.

Investment summary

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:

  • Stocks
  • Bonds
  • Company stock
  • Money market value
  • Other heads

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:

  • Preservation
  • Conservative
  • Balanced
  • Moderate
  • Growth

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.

How to make more sense of your 401(k) retirement income statement?

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.

Why is the 401(k) retirement income statement important?

Here are some reasons why a retirement income statement is important:

  • The 401(k) retirement income statement lets you be in charge of your retirement funds.
  • It gives you a clear view of how much money you have at hand. It also offers you a clear picture of your investment allocation, the fees incurred to maintain the account, how to plan your withdrawals, etc.
  • Lastly, but most importantly, you can gauge if you need to save more to maintain your current lifestyle in the future years.

What are the things to keep in mind when reading your 401(k) retirement income statement?

Although the retirement income statement has many benefits, it can also cause some confusion.

  • Firstly, the estimated retirement income may not be the same as your actual retirement income. This can sometimes present an incorrect picture that can either lead to financial anxiety or a feeling of over accomplishment, both of which can be detrimental to your retirement plan and peace of mind.
  • The estimated retirement income is based on the average retirement age. This may not be the same for everyone. Many people continue to work well into their 70s, while others may retire in their 40s or 50s. Hence, the estimation is not accurate or helpful for all investors.
  • The projected rate of return from your investments can also be incorrect as it is hard to predict how your investments will perform in the future.

How seriously should you take your 401(k) retirement income statement?

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.

To sum it up

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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