The CoRI Indexes are calculated using many of the same factors insurance companies and institutions use in pricing lifetime income, including interest rates, morality tables, cost of living adjustments and market risk. You can find more details about the calculation here.
Lessons Learned in the Q3 2014 Report
So what have we learned? Perhaps the biggest takeaway for pre-retirees is that the relationship between asset growth and retirement income is far more complicated than it appears.
For example, for the year ending September 30, 2014, the median retirement savings balance for a 55 year old rose 16.5%1, largely due to strong market growth. At the same time, the estimated retirement income cost for a 55 year old increased from $12.76 per dollar to $15.12. The net result is they can expect less retirement income despite the asset growth:
As of September 30, 2013:
|
Retirement Balance |
CoRI Index Level for 55 Year Old |
Estimated Retirement Income (divide balance by CoRI Index level) |
|
$1,000, 0000 |
$12.76 |
$78, 370 |
As of September 30, 2014:
|
Retirement Balance (Increased by 16.5% ) |
CoRI Index Level for 55 Year Old |
Estimated Retirement Income (divide balance by CoRI Index level) |
|
$1,160, 0000 |
$15.12 |
$76, 720 |
|
|
|
Difference: -$1650 |
The major driver of the increased cost of retirement income is that yields on 10-year Treasury notes fell over the year, from 2.64% to 2.52%. This change affected pre-retirees in their 60s less, who saw their market driven savings growth outpace the rise in retirement income costs, leaving them in relatively better shape than their younger peers.
It is counterintuitive that your retirement savings balance can increase while your retirement spending power decreases. That is one of the reasons that by tracking retirement income costs, you can develop greater clarity in your retirement planning.
1Per the Employee Benefit Research Institute (EBRI), and includes investments in both 401(k) plans and individual retirement accounts (IRAs).
Chip Castille, Managing Director, is head of the BlackRock US Retirement Group. You can find more of his posts here.