Most of our working lives, we think about our personal finances in terms of our paycheck and the big bills that come due each month – the mortgage, credit cards, utilities, insurance and so on.
But when we get statements showing the account balances for our retirement savings, we typically just see one big number – the total amount of savings in one retirement account. And it’s tough to know how that number translates into any sort of meaningful estimate of what our monthly income in retirement might be.
Translating the Nest Egg into Income
One solution: Instead of seeing just that one big number, consider focusing on a second number – the estimate of the income that your nest egg might generate down the road.
Seeing where you stand could help many of us figure out if we’re really on track to generate the income we need, or want, to live the way we expect in retirement. That’s especially important now that many people find themselves in retirement for two or three decades, or even longer. And if we’re not on track, that information could provide the jumpstart we might need to start saving more, to try to close the gap.
Focusing on income estimates is a popular idea among investors. In fact, a recent study found that people saving for retirement are overwhelmingly in favor of getting that information: Nine in 10 workers saving with 401(k)s told the Insured Retirement Institute, an industry group, that they want their account statements to include an estimate of lifetime income. And more than 75% said that they would substantially increase their contributions after seeing that estimate – by at least 4 percentage points.
A Tool for Estimating Lifetime Income
But there’s no need to rely on your employer to provide that information, because you can easily figure it out for yourself. We created a tool that lets you instantly get a lifetime retirement income estimate. The calculator is based on the BlackRock CoRITM Retirement Indexes (“CoRI Indexes”), which track the estimated cost of retirement income starting at age 65. In the first quarter of 2015, for example, the CoRI Indexes showed that the estimated cost of future lifetime income for 55-year-olds climbed by 11.78% in the 12 months that ended March 31. That happened even as, according to Index data*, median retirement savings for 55-year-olds with both 401(k)s and IRAs grew 12.20% (source: Employee Benefit Research Institute).
The lesson for investors? We believe it’s crucial to keep up with the estimated cost of your future retirement income, because it might not match up with the rise or fall in your nest egg’s value. Regularly checking your lifetime income estimate, as a translation of your nest egg “number,” provides you with a way to stay on track.
Chip Castille, Managing Director, is BlackRock’s Chief Retirement Strategist heading the Global Retirement Strategy 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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