Retirement Income Cost

A rocky start: Retirement income costs
hit investors hard

May 3, 2016

What happened in Q1

  • Retirement spending power declined for pre-retiree workers.
  • Market volatility meant lower investment returns for the average pre-retiree investors regardless of risk tolerance.
  • The cost to buy $1 of lifetime retirement income, as measured by the CoRI® Retirement Indexes, rose amid a continuing low interest rate environment, meaning it got more expensive for investors to generate annual retirement income.
  • As a result, pre-retiree workers saw about a 4-9% drop in the estimated retirement income they could generate from savings.
  • For a 60-year-old investor with $1M saved, this change is equivalent to about $3,000 of annual retirement income potential lost over Q1.

Changing retirement prospects for pre-retiree
investors invested in a 60/40 portfolio

Market retirement trends

Fears of a global recession hit markets hard at the start of the year with sluggish growth in the global economy and higher volatility contributing to muted investment returns. While investors did see positive growth in Q1, investors who are approaching retirement finished out the quarter with a loss.

Why? Because the estimated cost of retirement income rose faster than the market, eroding the purchasing power of retirement savings. Investments did not grow at a rate that was able to keep up with these rising costs, leaving pre-retirees worse off at the end of Q1 than at the start of 2016.

Estimated cost of retirement income

Reflects savings level that could generate $1 of annual lifetime retirement income starting at age 65, as measured by the CoRI 2020 Retirement Index

Take, for example, a 60-year-old investor with $1M in retirement savings that is invested in an average 60/40 asset allocation. Assuming no other changes to her retirement savings, such as additional contributions, this investor would have experienced a 1.51% return in her investments, the equivalent of $15,100 of additional assets at the end of Q1.†

However, the cost for this investor to generate $1 of estimated annual retirement income, as measured by the CoRI Retirement Indexes, also increased, rising 7.83%. This means, that to maintain the purchasing power this investor enjoyed at the start of 2016, she would need an additional $78,300 saved or generated.1

Compare the $78,300 this investor would need to the $15,100 she gained, and this leaves this investor with a $63,200 gap, translating into about $3,2502 of estimated annual retirement income lost.† The negative impact of rising costs of retirement income was felt particularly strongly by younger investors, where the cost rose by as much as 10% for 55-year-old investors.3

This trend was driven by a drop in rates over the quarter, with the 10-year Treasury falling from 2.3% to 1.9%, amounting to a 18.23% decline. Looking ahead, interest rates are expected to remain low, while markets may continue to see volatility and low growth. In this environment, it is particularly important for pre-retiree investors to continue tracking their retirement readiness against the changing costs of retirement income, monitoring that the purchasing power of their retirement savings is, in fact, growing at a rate that will help them meet their retirement goals.

How much estimated annual retirement income did
investors gain or lose over Q1?

How are the estimated annual retirement
income changes calculated?

Estimated annual income is calculated assuming $1M of retirement savings, invested for pre-retirees of different ages and risk tolerances. Returns for the $1M of savings are calculated using three sample asset allocations that were selected to represent diversified, age appropriate investment strategies consistent with various risk tolerances for preretiree investors. These allocations provide representative performance based on the total return of underlying indexes that make up each sample asset allocation, including the MSCI ACWI Index, MSCI US Index, and Barclays US Universal Index. Returns are then divided by an age-appropriate CoRI Index level as of Mar. 31, 2016 to estimate the annual retirement income pre-retirees could potentially generate from their savings starting at retirement (age 65).

What are the CoRI Indexes?

BlackRock’s CoRI Retirement Indexes offer investors ages 55 to 74 a daily estimate of the “price” today of a dollar of annual retirement income starting at age 65. The CoRI Indexes are a series of bond indexes designed to help investors figure out where they stand today and set a forward-looking strategic plan to help manage their wealth toward a specific retirement income goal. The CoRI Indexes provide a clear, intuitive translation of how much annual retirement income investors current savings could generate or, conversely, how much they need to save to potentially generate the retirement income they want. This process that the CoRI Indexes enable of managing saving, spending and wealth toward specific retirement income goals, can be packaged through tools and technology to deliver a repeatable and actionable user experience.

What changed?

  • A rise in interest rates in late 2015 gave pre-retirees a boost in spending power, compared to declining rates in the first quarter of 2016 that had the opposite effect.
  • The sharp rise in retirement income costs in Q1, 2016 offset any gains enjoyed in late 2015.
  • Volatile markets continued, causing negative investment returns through the end of 2015 followed by slight positive returns in early 2016. However, market performance over both of the last two quarters was overpowered by sharp changes in the cost of retirement income leading pre-retiree investors to experience a gain in estimated annual retirement income in Q4, 2015, but a loss in Q1, 2016.


All calculations for a 60-year-old investor based on the CoRI 2020 Index as of Mar. 31, 2016.
Calculated by dividing the investor’s lump sum income gap by her CoRI Index (CoRI Index 2020) level: $63,200 / $19.42 = $3,250.
All calculations for 55-year-old investors based on the CoRI 2025 Index as of Mar. 31, 2016.

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