The rising cost of retirement – don’t panic, plan

Tony Stenning |19-Sep-2016

The cost of retirement has risen sharply this year. Find out why.


How would you answer a client who wants to know what income their savings could buy in retirement? What would you tell someone who came to you wanting to know how much they need for a given retirement income? These may have been some of the questions raised during Pensions Awareness Week.

For example, imagine that somebody wants to retire with an income of £20,000 a year, inflation linked, in 10 years’ time. What’s the going rate to guarantee that income and how large a pension pot would be needed?

The answer is just over £550,000* for a 55-year old-looking to retire in 10 years’ time. To put that slightly differently, that client needs £27.75 in savings for each £1 of retirement income required. That ratio will be daunting for many savers and it has been rising sharply.

It is up 42.6% since the end of June 2015 when it was £19.46 and has risen 13.7% from £24.41* in less than three months since the Brexit vote.

How would you answer a client who wants to know what income their savings could buy in retirement?

The upside is that at least knowing and having a figure based on the same institutional grade analytics that actuaries use when calculating pension fund liabilities or annuity pricing, can at least help people start to plan for a realistic retirement.

The figures above come from BlackRock’s Cost of Retirement Income (CoRI) tool, an interactive online system to help visualise retirement choices more effectively to your clients. What distinguishes CoRI is that it is based on annuity-pricing methods and the income estimates are based on real-world data. By taking into account interest rates, inflation and mortality projections among other factors, CoRI generates a ‘live’ estimate of the income a client’s savings may provide in retirement. Its proprietary process incorporates standard cash-flow modelling and actuarial practices used within liability-driven investment techniques. It helps answer the question: ‘What income will my savings buy me when I retire?’

Using CoRI does not mean clients are being encouraged to annuitise. Quite the opposite. It is a reference point for those who intend to remain invested – a backstop to reassure them they could still lock into that income should they choose to annuitise at any point.

As well as helping people assess how large a pension pot they will need for a desired retirement income, CoRI can also help illustrate to clients what income their current savings could buy. Because the data is calculated daily, it can immediately reflect the often overlooked effects of significant market events on potential retirement income.

The CoRI tool can therefore help to perform three broad functions for clients:

  • It can act as a calculator to translate their current savings into a projected lifetime income quickly and easily
  • It can serve as a benchmark to measure clients’ portfolios against their retirement income goals
  • It can help them understand how the cost of retirement changes over time

We believe CoRI will help make important retirement choices easier to understand, so that you and your clients can make informed decisions together. Look out for exciting new tools from us next year which build on CoRI.

Tony Stenning
Managing Director, Head of Retirement for EMEA
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* All figures taken from BlackRock’s Cost of Retirement Income (CoRI) tool as of 12 September 2016.

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