Accountants have a word for the things we own: assets. They have a word for what we owe: debt. Our personal balance sheet has assets on one side and debts on the other. The difference between the two is one measure of our financial health.
But where does your retirement sit on your balance sheet? It may surprise you that for an accurate picture of your financial health, you should think of retirement as a debt. But unlike your mortgage, which is a debt you owe the bank, retirement is a debt you owe yourself. This raises two questions. The first is how do you pay that debt and the second is what’s a fair price to pay for your retirement?
How to pay down retirement “debt”
Like your mortgage, you pay down your retirement debt over many years by making a stream of payments into your retirement account. That’s the beauty of a workplace retirement plan that seamlessly diverts income against your retirement debt. What’s more difficult is how to determine the amount of our retirement debt or the fair cost for satisfying that debt.
Imagine owing a mortgage of an unknown amount. Each month we make a payment we hope is sufficient. But we won’t know for 30 years whether we’ve made enough payments—and if we haven’t, we may need to accept drastic changes the day the final mortgage balance comes due. You would not accept that kind of uncertainty when you buy a house, but we routinely accept it when it comes to paying our retirement debt.
There is a simple way to help address this problem. First, think about how much you want to spend each year in retirement. Let’s say that you want to spend $75,000 per year. Next, you need to understand a fair price to pay for that income.
How to determine a fair price
The BlackRock CoRI™ Retirement Indexes can help. Designed for investors aged 55 to 74, each CoRI Retirement Index estimates the fair value of $1 of annual lifetime retirement income beginning at age 65. Let’s say you’re 56 years old. On June 2, 2015, the level for the appropriate index was $15.19. If you multiply the $75,000 in desired income by the $15.19 price you can now estimate the cost for satisfying your retirement debt—$1,139,250.
Just as home prices and mortgage rates can fluctuate in value, so can the cost of your retirement, particularly in response to interest rates. If you periodically recalculate the cost of your retirement, you’ll see it is not only one of the larger items on your balance sheet, it’s also likely one of the most volatile.
Regardless, being able to track the value of your retirement debt on your personal balance sheet gives you an important way to monitor your financial health. Even better, having this information can help us understand the actions we need to take now like saving more, adjusting our investment portfolio, or working an extra year, to realize our retirement goals.
Chip Castille, Managing Director, is BlackRock’s Chief Retirement Strategist heading the Global Retirement Strategy Group.
CoRI Retirement Index levels are updated daily and are subject to change over time.
This information should not be relied upon as investment advice, research, or a recommendation by BlackRock regarding (i) the use or suitability of the indexes or (ii) any security in particular. Investors should consult their financial advisor to evaluate their investment needs. 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.
The examples presented in this material are for informational purposes only 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. The opinions expressed may change as subsequent conditions vary. Reliance upon information in this material is at the sole discretion of the reader. Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2015 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
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