Retirement Income Cost

Cost of retirement income jumps 33% despite equity market gains

Jan 21, 2015

At a glance

  • Despite double-digit gains in equity markets, workers in their 50s and early 60s are less prepared for retirement than they were 12 months ago. In fact, the estimated cost of future lifetime retirement income for 55-year-olds jumped 33.28% in the 12 months that ended Dec. 31, effectively wiping out savings gains.
  • This is because the estimated cost of future lifetime retirement income, as tracked by the BlackRock CoRI Retirement Indexes ("CoRI Indexes"), was affected by the continued decline of long-term interest rates.
  • In contrast, workers in their mid-60s saw their nest eggs continue to grow faster than their estimated cost of future lifetime retirement income. But their nest eggs would replace only a fraction of their paychecks.

Retirement income costs rising faster
than portfolio values

The estimated cost of future lifetime retirement income for 55-year-olds jumped 33.28% in the 12 months that ended Dec. 31, effectively wiping out savings gains, according to an analysis using the BlackRock CoRI Retirement Indexes (“CoRI Indexes”). These indexes are designed to estimate how much an investor would need to have saved today to generate each dollar of annual income in retirement, starting at age 65.

The retirement-income cost rose even though strong equity returns bolstered retirement nest eggs for U.S. workers, with the median retirement savings portfolio for 55-year-olds increasing 14.07% to $280,035. That total specifically refers to workers with savings in both 401(k) accounts and individual retirement accounts (IRAs), as tracked by the Employee Benefit Research Institute (EBRI).

For workers who were 55 as of Dec. 31, 2013, a dollar of estimated annual retirement income would have cost $12.47. Twelve months later, that cost rose to $16.62. As a result, those workers’ median nest egg value of $280,035 could only generate estimated retirement income of $16,849 a year starting at age 65. What’s interesting (and counterintuitive) about that result: Even though the savings portfolio grew in value, it would be on track to generate almost $3,000 less in annual retirement income than the smaller nest egg 12 months ago.

These numbers have a sobering message: Workers now need to increase their savings to generate the same retirement income that a smaller nest egg, a year ago, was positioned to provide in retirement.

Falling long-term rates batter potential retirement income

What’s driving up the cost of future retirement income? The main factor: The continued slump in interest rates. Yields on 10-year U.S. Treasury notes fell a staggering 28.62% last year1. Jeffrey Rosenberg, BlackRock’s Chief Investment Strategist for Fixed Income, says that “predictions of rising rates again flummoxed the ‘experts.’” And BlackRock’s 2015 Outlook predicts that “long-term interest rates may inch up this year, but expect them to be low for some time to come.”

Each CoRI Index level reflects the performance of bonds that are selected to follow median annuity prices for each age, and change daily. Long-term interest rates are one of the primary factors driving those annuity prices. When interest rates faltered, the CoRI Index levels rose, indicating that the cost of generating retirement income has increased.

Again, these findings show that savings gains don’t necessarily mean workers will be better off in retirement. When interest rates decline, so do retirement-income prospects. That means focusing on the size of your nest egg doesn't tell you much more than whether your retirement portfolio has grown or shrunk. While total return is important, you should also consider future income, so you can plan for the annual retirement income that your current savings could provide.

Slower rise in costs for older workers:
Too little, too late

For workers who were 64 as of Dec. 31, 2013, the results should provide a wake-up call. The good news is that their nest eggs grew, and in fact outpaced the cost of future lifetime income. Their median nest egg increased 19.32% to $282,051, as of Dec. 31, while the estimated cost of future lifetime retirement income rose only 11.7%. Their costs went down more slowly than those for workers in their 50s and early 60s because annuity rates for workers nearing age 65 are less impacted by interest rate moves.

The bad news: The oldest workers tracked in this analysis have too little saved for those gains to make a difference. The portion of their workplace paycheck that they could replace in retirement didn’t budge. That means they still will have to find ways to afford increasing longevity, from working longer to saving more and spending less, either now, in retirement, or all along the way. After all, in the era of new longevity, we want our income to last throughout our longer lifetimes.

Examining retirement income

To analyze retirement income prospects for workers at ages 55, 60 and 64 as of Dec. 31, 2014, compared with Dec. 31, 2013, BlackRock relied on work from the Employee Benefit Research Institute (EBRI), a Washington D.C. research organization that tracks U.S. retirement savings by age for workers invested both in 401(k) plans and also IRAs. With that data and median income from Dec. 31, 2012, EBRI modeled quarterly projections of investments and income. BlackRock then combined that data with the CoRI Indexes to estimate how much income pre-retirees are positioned today to generate from their savings portfolios starting at age 65. Comparing the results with EBRI’s median income estimates shows the approximate percentage of pre-retirement income those individuals could replace.


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Chip Castille
Chief Retirement Strategist, BlackRock
Chip Castille, Managing Director, is BlackRock's Chief Retirement Strategist heading the Global Retirement Strategy Group. He is responsible for managing global ...