When you're in the process of saving for retirement, it's natural to keep tabs on your 401(k) balance. Once retirement gets closer, you may start to fixate on the number you see on the screen, whether it's $500,000, $1 million, or more.
When you look at that number, you might take comfort in the fact that it's pretty large. But your 401(k) balance doesn't tell the whole story.
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What actually matters more than your balance is the amount of income your retirement savings can provide each year. It's crucial that you figure out what that number is before you stop working.
Once you retire, you're not going to empty your 401(k) in a single year (or, at least, you really shouldn't). Rather, you might need that money to last 15 years, 20 years, or longer. That's why translating your 401(k) balance into annual retirement income can be one of the most valuable exercises you do before leaving the workforce.