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Retirement spending for the next generation: LifePath® Spending Tool

BlackRock |Sep 9, 2019

The next generation of retirees might not have the choice of leaving their savings unspent. Not only are they living longer, they might not have access to as many supplementary retirement income streams and may face a very different market environment. Relying on outdated income strategies or trying to live off investment returns alone might not provide enough cash flow to support the lifestyle participants expect.

For these future retirees, the unified framework provided by target date funds might enable plan sponsors and providers to help participants grow their assets with retirement spending in mind. But most importantly, it will require plan sponsors to offer new tools and guidance. In fact, the 2019 DC Pulse Survey found that 90% of participants agree their plan should offer an estimate of what they can safely withdraw each year in retirement.

The LifePath® Spending Tool

The LifePath Spending Tool is designed to help current retirees estimate retirement spending over a lifetime based on current age and retirement savings, using BlackRock's long-term capital market assumptions. Unlike many decumulation strategies, the tool explicitly addresses longevity by factoring mortality probability into its extended forecast.

Turning retirement savings into income is a three-part problem based on:

Turning retirement savings into income is a three-part problem

The latter two–market returns and risks, and longevity–are difficult, if not impossible, for an individual to solve on his or her own. To help individual retirees more confidently address these challenges, BlackRock developed the LifePath Spending Tool.

The tool is designed to help current retirees 63-95 estimate retirement spending for the current calendar year. Retirees are encouraged to return to the tool annually to get an updated spending withdrawal estimate and a refreshed spending projection.

Sample estimated spending

Sample estimated spending

Source: BlackRock, 2018. For illustrative purposes only.

The retirement income solution you already offer

We believe the necessary framework to manage these elements is already in place in many DC plans in the form of target date funds. Target date funds are typically considered accumulation vehicles, but we believe it is equally important that they are built with decumulation in mind. Our research supports a retirement vintage portfolio of 40% equity/ 60% fixed income can help meet the spending objectives and enable efficient decumuluation.

The challenge of retirement spending has changed. It requires a new set of expectations on behalf of retirees, and new tools and information to help them enjoy the full benefit of their retirement savings. BlackRock’s LifePath Spending tool is here to assist the next generation of retirees.

To learn more about the underlying methodology of the LifePath Spending Tool, download the full paper.

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