Retirement Income Cost

How changing rates could impact
retirement income

May 22, 2015

At a glance

  • The estimated cost of future lifetime retirement income for workers in their 50s and early 60s continued to rise in the first quarter—but at a slower pace than a year ago.
  • What changed? The decline in long-term interest rates started to level out, reducing the impact on retirement income prospects.
  • It’s important for pre-retirees to keep in mind that retirement investments are sensitive to interest rate changes. That means investors should check their retirement income estimates periodically so they have time to make adjustments to stay on course.

Chart: How changing rates could impact retirement income

Income prospects worsen, but
pressure starts to ease

The good news: Fixed-income markets gave most pre-retirees a small assist this quarter in closing the gap between their savings and the retirement income they want. The estimated cost of future retirement income is still rising—but the increase was smaller than in recent quarters, according to an analysis using the BlackRock CoRI Retirement Indexes (“CoRI Indexes”). These indexes were designed to help pre-retirees estimate how much annual income their savings could provide, starting at age 65.

The bad news: The estimated cost of generating income in retirement still rose faster than the value of retirement investments. The median nest egg for 55-year-old workers could generate only $16,252 a year starting at age 65—down from $18,422 last year.

Rate talk and market swings
should prompt check-ups

The main reason for the drop: Lingering low interest rates. Yields on 10-year U.S. Treasury notes fell a whopping 28.94% in the 12 months ended March 31. The Federal Reserve has opened the door to raising short-term rates later this year, but it’s unclear how many rate increases could be coming, when they might happen—or what their impact may be on long-term rates.

Why do long-term rates matter to pre-retirees? The CoRI Indexes measure how much your retirement income could cost by tracking specific bonds. More specifically, each CoRI Index level reflects the performance of bonds that are selected to track median annuity prices. And long-term interest rates are one of the primary factors driving those annuity prices. While rate increases could be rough on some bond portfolio returns in the near term, they might make annuities more affordable—and potentially temper costs a bit for workers investing with a specific retirement-income goal in mind. Looking back, when 10-year Treasurys rose almost 20% in the second half of 2013, the CoRI Index 2023 level fell by 5.17%, meaning every $1 in annual retirement income cost about five cents less.

Equity markets matter too, of course, to people investing for retirement—and are likely to be volatile in the next year due to economic uncertainty. That could impact nest eggs as well, and any changes in the value of workers’ savings also could affect their retirement-income estimates.

So, with financial markets in flux, it’s no longer safe to rely on a “set-it-and-forget-it” course for retirement planning. Instead, in this era of new longevity and more volatility, it’s crucial for investors 10 to 15 years from retirement to regularly check on their prospects for future income—and the CoRI Indexes provide a way to do so. Armed with this knowledge, pre-retirees have time to make decisions about whether to work longer, save more or invest differently—and still seek to achieve the retirement they want.

Examining retirement income

To analyze retirement income prospects for workers at ages 55, 60 and 64 as of March 31, 2015, compared with March 31, 2014, 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.


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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 ...