If you’re tracking your retirement investments at all, you probably noticed some sizeable gains in your 401(k) or IRA last year. That’s good news.
But what if we told you that those bigger savings are expected to generate less income in retirement than the smaller nest egg you had at the end of 2013?
That counterintuitive result is, unfortunately, exactly what we found for retirement savers in their 50s and early 60s in the fourth quarter’s CoRITM Retirement Indexes Commentary.
But there is a potential solution: Investors need to shift their main focus to retirement-income costs, and quit fixating on their “number” – the amount people think they have to save to safely give up their day job.
In the past, when many workers had pensions, and people who depended solely on their own savings felt more confident that their money would last if they stuck to the 4% rule, focusing on a lump-sum savings goal seemed (relatively) safe.
But now, with many investment experts arguing that market volatility is here to stay, and low interest rates all but wiping out returns on money-market funds and certificates of deposit for much of the past decade, we need a new benchmark for retirement saving. We need to shift our focus away from the total value of the nest egg, and instead toward the annual income it could provide.
It’s an approach that Morningstar columnist John Rekenthaler recently argued for, saying that there are “three moving parts” when estimating retirement income: The portfolio value (or total return), annuity rates and the time remaining to retirement.
“With three levers in operation, it’s quite possible for a fund to succeed according to total return but fail as measured by projected income,” he wrote.
The Wall Street Journal last month described the approach as a way for investors to get “a clearer picture of whether they are nearing their retirement-savings goals by focusing less on the dollar amounts they’ve accumulated and more on how much income that money can generate in the future.”
That’s why we created the BlackRock CoRI Retirement Indexes – to shift our focus away from the total value of the nest egg, and instead toward the annual income it could provide, starting at age 65. We take the information gleaned from the indexes to help you build a better retirement strategy, as I discussed in a previous post. So what did we learn in our fourth-quarter analysis of the indexes? The estimated cost of future lifetime retirement income for 55-year-olds jumped 33.28% in the 12 months that ended Dec. 31. Meanwhile, median retirement savings portfolio for 55-year-olds climbed 14.07% to $280,035, mainly due to strong equity markets. But those gains were effectively wiped out by the increasing costs involved in generating future income from those assets. (The savings total includes 401(k) accounts and individual retirement accounts (IRAs), as tracked by the Employee Benefit Research Institute (EBRI).)
Do we have you wondering yet how much annual income your own retirement savings might provide? We developed a tool to help answer that question. Check in on that number – and do so often. It might give you just the incentive you need to keep your resolution to save more – and to sock away any bonuses you get rather than spending them now.
Chip Castille, Managing Director, is head of the BlackRock US Retirement Group. You can find more of his posts here.
IMPORTANT: The projections or other information generated by the CoRI tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. These results may vary with each use and over time.
The CoRI Retirement Indexes do not guarantee future income or protect against loss of principal. There can be no assurance that an investment strategy based on the CoRI Retirement Indexes will be successful. Indexes are unmanaged and one cannot invest directly in an index.
Examples shown in this material are for informational purposes only, are subject to change and do not represent an actual account. The CoRI Retirement Indexes do not reflect the fees, expenses and cost that may be associated with an annuity or any other retirement income product that an individual may purchase, or any assumption that such a product will be available for purchase at the time of retirement. Actual investment outcomes may vary. A number of factors may contribute to variations in retirement income. Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction.
Although BlackRock obtains information from sources which BlackRock considers reliable, neither BlackRock nor its subsidiaries or any other third party involved in, or related to, compiling, computing or creating the information (collectively, the “BlackRock Parties”) guarantees the accuracy and/or the completeness of any of this information.
The CoRI Retirement Indexes are maintained by BlackRock Index Services, LLC (the “Affiliated Index Provider”), a subsidiary of BlackRock, Inc., that designs, sponsors and publishes indices for use in portfolio benchmarking and portfolio management. While the Affiliated Index Provider publishes descriptions of what the CoRI Retirement Indexes are designed to achieve, the Affiliated Index Provider does not provide any warranty or accept any liability in relation to quality, accuracy or completeness of data in respect of the CoRI Retirement Indexes, and does not guarantee that the CoRI Retirement Indexes will not deviate from their stated methodologies. The Affiliated Index Provider does not provide any warranty or guarantee for Affiliated Index Provider errors.
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