How to use expense projections to add definition to retirement readiness

Part of our State of the Participant 2023 series: insight and tools to help participants on their journey to retirement

What retirement expense projections reveal and how they’re calculated

Income replacement ratios help show us if a participant is on track to maintain his or her current standard of living in retirement; however, retirement expense projections push planning forward in time by looking at the retirement expenses participants might face and what portion of these costs they may be on track to cover.   

How is a retirement expense projection calculated?

John Hancock includes the following factors in our expense coverage calculations:

• Participant's current age
• Retirement age of 67
• Account balance
• Contributions received to date and projected to retirement
• Data on other income sources, health, and retirement location added by the participant
• Social Security projection

The calculation results in a projection of potential expenses and income for every year in retirement—and the portion of these expenses the participant is on track to cover.

How expense projections expand the view of retirement readiness

Easily understood and widely used, income replacement ratios supply a valuable snapshot of a DC plan’s effectiveness on the individual, group, and total workforce level. By also including expense coverage data, you can provide your employees and organization deeper insight into retirement readiness.

One limitation of income replacement ratios is that they’re based on the idea of participants living a similar lifestyle in retirement as they do today. This standard may not be appropriate for those who are currently struggling financially or who have specific ideas about the kind of retirement they want to live.

By adding an expense-based measurement, you can allow individuals to look ahead at how much they’ll need to cover their basic, healthcare, and nonessential costs such as entertainment. And by exposing any potential gap they’ll face in covering these needs, expense projections can help the individual plan more effectively for the retirement they want.

A hypothetical look at an expense-based planning tool

For illustrative purposes only. Individual circumstances may vary.

This hypothetical visual adapted from John Hancock’s participant website shows two ways expense coverage data can be presented to participants. The landscape chart shows the sweep of projected retirement expenses and income through the retirement years. The overlay box shows specific breakouts of basic (food, housing, transportation, and taxes), healthcare, and nonessential expenses at a specific age.

Analyzing retirement expense projections

While younger participants are getting their footing, projections are strong for older segments

As a whole, participants in John Hancock plans¹ who engage in expense-based planning seem on their way to creating adequate retirement income, with average and median expense coverage ratios of 76.2% and 79.0%, respectively. The numbers below reflect the average percentage of projected retirement expenses that participants in each group are expected to be able to cover.

Retirement expense coverage by age and overall

For illustrative purposes only. Individual circumstances may vary.

A closer look reveals that the under-age-30 group is the least on track to covering their expenses in retirement, with an expense coverage projection of 68%. By age 40 and beyond, all average and median ratios remain in the high-70s to mid-80s. This includes the segment closest to retirement—those 60 and older.

Pacesetter segments: age groups with the highest percentage of participants with a retirement expense coverage of 95% or above

For illustrative purposes only. Individual circumstances may vary.

Lagging segments: age groups with the highest percentage of participants with a retirement expense coverage below 65%

For illustrative purposes only. Individual circumstances may vary.

Using expense coverage ratios to help shape better outcomes

If you can gauge where participants stand in covering their potential retirement expenses, it can help shape better decisions at both the plan and participant level. We’ve assembled some tools for your plan tool kit to help you make expense coverage projections part of your plan management strategy. 

Tools for measurement

• Develop a system for using plan data and participant input to create retirement expense projections.

Tools for improvement

• Introduce an income planning tool that makes detailed retirement expense analysis and data-driven action available to all participants
• Add targeted communication and education centered around retirement expense planning
• Provide easy paths for participants to improve their retirement expense coverage—including what-if modeling and contribution adjustment capabilities inside the planning tool
• Help participants improve budgeting, debt management, and other hands-on skills that can help keep them prepared through their retirement years

1 All John Hancock DC plan participants are eligible for retirement expense projections, which call for verification of some basic information such as earnings and expected state of residence in retirement. The numbers are based on a study of participants on our open architecture recordkeeping platform who activated their expense projections between June 30, 2022, and June 30, 2023. 

All data is from our open architecture platform. 2022 data reflects John Hancock Retirement Plan Services LLC’s 1,756 plans, 1,440,374 participants, and $95,176,036,431 in assets under management and administration (AUMA) as of June 30, 2022.  2023 data reflects John Hancock Retirement Plan Services LLC’s 1,966 plans, 1,511,835,participants, and 100,319,359,778 in AUMA as of June 30, 2023.

The projected retirement income estimates for your current John Hancock accounts, future contributions, employer contributions (if applicable), and other accounts set aside for retirement; the projected retirement expense estimates based on proprietary algorithms and predictive analytics; and your retirement readiness score/calculation results from a comparison of your projected income and projected expenses in retirement are hypothetical, for illustrative purposes only, and do not constitute investment advice. Please review the calculations and assumptions section for additional details. When calculating your retirement readiness, you should always consult with your personal financial and legal advisors. Results are not guaranteed and do not represent the current or future performance of any specific account or investment. Due to market fluctuations and other factors, it is possible that investment objectives may not be met. Investing involves risks, and past performance does not guarantee future results.

The projected balances at retirement age and income replacement ratios within the dashboard are hypothetical and for illustrative purposes only. Results are not guaranteed and do not represent current or future performance of any specific account or investment. Due to market fluctuations and other factors, it is possible that investment objectives may not be met. Investing involves risks, and past performance does not guarantee future results.