And now for a financial update: For the year ending September 30, the cost of future lifetime retirement income has outpaced increases in retirement savings balances. That’s left many pre-retirees with lower estimated retirement income despite strong market growth over the same period.”
If that does not sound like a market update you’ve heard before, you’re not alone. You’re probably asking what does the cost of lifetime retirement income mean. Is it really something that can be quantified and tracked? And why should it be?
You may be surprised that the update is a reasonable paraphrase of a newly released quarterly update that describes changes in the BlackRock CoRI™ Retirement Indexes (“CoRI Indexes”). The CoRI Indexes were introduced in June 2013 to help pre-retirees estimate and track the cost of future retirement income, which we believe is as potentially meaningful as stock market indicators to their future financial security. Now with over a year of published index data to examine, we can begin to look at retirement income in new ways.
But first, we need to answer a few questions:
What is retirement income?
For our purposes, let’s define retirement income as any method of obtaining a stream of income from a retirement account savings balance. We’ll exclude other sources of retirement income not dependent on your savings, such as Social Security.
Why should income “cost” me anything?
If you buy an income product, such as an annuity, you are paying a third party to assume longevity, market, interest and inflation risks on your behalf. (In other words, they are contracted to pay you for as long as you live, regardless of what the market does.) Even if you have no interest in an income product, we believe that estimating the cost of buying retirement income can help clarify your planning.
How does it help clarify my retirement planning?
It gives you something to measure your retirement drawdown strategy against. For example, if your estimated retirement income is much lower than you anticipated, you may need to reexamine your plans. It can also help you estimate how much you need to save in order to obtain a certain income level.
How do the CoRI Indexes estimate the cost of retirement income?