I’m 30, make $75,000 and have $65,000 in my 401(k), with plans to keep saving. But my future income projections are very low. What’s going on?

Let’s pretend, for example, that Jerome is 30, makes $75,000, and has invested $65,000 into his 401(k) account. He plans to keep saving regularly, but is concerned that his 401(k) statement projects that his future income will be very low.

Jerome wants to know why his statement suggests his investments will produce just a few thousand dollars in annual income as a retiree, especially as he’s come close to saving a year’s worth of income by age 30, which is the generally recommended amount.

The good news for Jerome is that there’s actually a reason why his estimates are misleading. And he has plenty of options to more accurately calculate the positive impact his diligent savings will have on his future retirement security.

Income projections on 401(k) statements don’t show the full picture

Unfortunately, the big problem with the income projections on 401(k) statements is the way in which the statements calculate future income.

Specifically, the income projections are based only on your current balance. The calculation does not factor in any future contributions or investment growth.

So, while Jerome anticipates investing for decades, the income estimates listed on his current 401(k) statement will be based on how much his current $65,000 balance could end up providing. As a result, his balance statement would show him with around $4,300 in annual income.

In reality, Jerome’s money is going to grow. He’ll most likely end up with far more than his current $65,000 by the time he’s ready for retirement. In fact, his actual future income projections could be over 10 times higher assuming he keeps saving consistently and invests his money wisely.

Why are 401(k) income projections so misleading?

Lisa Gomez, the former Assistant Secretary of Labor for Employee Benefits Security in the U.S. Department of Labor, told Moneywise there’s a simple reason as to why plans write income projections this way.

“The requirement to project future monthly income using only current account balances exists because plans want to avoid liability for overpromising,” Gomez said. “A projection that assumes a worker contributes 10% of their salary for 30 years only holds true if that worker stays with the company and never sees a pay change.”

Gomez explained that, if a 401(k) plan used the wrong projections or the assumptions didn’t pan out, workers would end up with much less money. This could be a huge problem.

“The plan then faces accusations of misleading the worker,” she told Moneywise. “Using the current balance keeps the projection anchored in what the plan actually knows today.”

Unfortunately, projecting future income based on current savings levels can be confusing to current workers who may think they’re saving a lot, only to appear on paper as if they will end up with very little.

“It protects the sponsor. It does not help the saver,” Gomez said.

Clifford Cornell, financial advisor at Bone Fide Wealth, LLC, also said it can be very misleading.

“If this is based on the current balance, it is leaving a lot out of the picture,” Cornell told Moneywise.

Receiving an unexpectedly low estimate for future 401(k) income could be an especially big problem because, as Stanford Research revealed, when savers get more optimistic estimates of their future income from savings, this often increases their financial confidence and encourages them to invest more.

Those who see very low income numbers, on the other hand, may feel like they’re working hard, but their efforts won’t be rewarded by higher income in retirement.

How could the faulty income projections be fixed?

Fortunately, there are fixes that could help workers get a more accurate picture of what their investments can do for them in the future.

“The Department of Labor could address this by creating an optional safe harbor for alternative illustrations, paired with clear participant safeguards,” Gomez said. “Plans are already allowed to show these projections. The problem is that liability protection only attaches to the required current-balance format. Fiduciaries will not volunteer for that exposure.”

Gomez explained that a “safe harbor would remove the disincentive.” In other words, 401(k) plans would be more likely to send out estimates of future income that take investment growth and additional contributions into account if the government created rules that allowed them to do so without risk.

Alternatively, the government could actually choose to require that employers provide more potential future income scenarios, other than assuming no growth at all.

“Congress could take it further by amending the statute to mandate broader illustrations and codify the liability shield,” Gomez explained.