LifePath Spending Methodology and Assumptions

The LifePath Spending Tool uses a handful of inputs to help retirees understand their spending potential year-over-year in retirement.

Inputs

Current Age (62 – 95):

The tool assumes the value entered is (i) the user’s age in the current calendar year, (ii) the user has already retired, and (iii) she is no longer collecting any wages.

Current Savings ($1,000 - $10,000,000):

The tool assumes the value entered is (i) the amount of money that the user currently has invested for retirement and (ii) that the inputted dollar amount is invested in a diversified stock and bond portfolio with the stock and bond split selected under the Portfolio Equity Allocation input.

Portfolio Equity Allocation (30%, 40%, 50%, or 60%):

The default is set at 40%. The tool assumes that the value selected is the equity allocation of the user’s retirement portfolio (the remaining percentage is assumed to be invested in bonds).

Social Security Income ($0 – $100,000[1]):

The tool assumes that the user enters an appropriate annual amount and does not provide any checks on, or changes to, this user-entered value.

Outputs

Estimated Spending and Estimated Spending Range:

Estimated Spending and Estimated Spending Range represent a projection of the amount of annual or monthly (as selected) spending potential a retiree, aged 62 to 95, may have year-over-year in retirement. Estimated Spending is derived using the Current Age, Current Savings, and Portfolio Equity Allocation selections inputted by the user. If a user selects to show spending as a monthly figure, this is the annual value divided by 12.

The tool does not factor in required minimum distributions, which are set by the Internal Revenue Service, or any taxes that may be incurred.  

Estimated Spending and Estimated Spending Range projections are calculated using a Monte Carlo simulation, which is a statistical modeling technique that forecasts a set of possible future outcomes based on the variability or randomness associated with historical occurrences. These projections are based on a number of factors including the Current Age, Current Savings, and Portfolio Equity Allocation inputs, longevity assumptions, risk aversion assumptions, long-term capital market assumptions, and asset class risk premium assumptions (each assumption is discussed in greater detail below).

The Estimated Spending Range shows a low and high value at the 68% confidence level. This reflects a 68% probability that the annual Estimated Spending projection will fall within the Estimated Spending Range shown. Monthly values are the annual figures divided by 12.

Year-over-year, this estimated amount under each Portfolio Equity Allocation selection will vary based on changing age, remaining savings balances, and updated assumptions described above.

This information is provided for educational purposes only and is intended to provide current retirees between the ages of 62 and 95 with an estimated spending potential and range based on their Current Age, Current Savings, and Portfolio Equity Allocation, but is not individualized investment advice. A retiree’s retirement needs may be influenced by a variety of factors that are not included in this analysis. Investors should consult with their advisors to help evaluate their retirement needs.

Estimated Spending and Estimated Spending Range are projections based on the probability or likelihood of generating a particular level of retirement income. Projections are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Actual retirement income could be higher or lower based upon a number of factors and circumstances not addressed herein.

All retirement spending estimates are pre-tax.

Estimated Savings and Estimated Savings Range:

Estimated Savings and Estimated Savings Range represent the projected annual amount of savings a retiree, aged 62 to 95, may have at each age based on the Estimated Spending projections and estimated market performance. 

Estimated Savings and Estimated Savings Range are annual projections based on the probability or likelihood of generating a particular level of retirement income. Projections are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Actual retirement savings could be higher or lower based upon a number of factors and circumstances not addressed herein.

All retirement savings estimates are pre-tax.

Social Security Income:

The tool passes through the annual benefit amount that a user entered on the Profile page. The tool assumes (i) that this benefit amount is adjusted for inflation, (ii) remains constant in real (today’s) dollars, (iii) the user spends the entire benefit amount each year, and (iv) a monthly figure is equal to the annual amount entered by the user divided by 12. Additionally, the tool does not factor in any taxes that may be due beyond the value entered by the user.

This information is provided for educational purposes only and the tool does not guarantee that the user will receive or continue receiving Social Security payments.

Assumptions

Asset Allocation:

The tool assumes all Current Savings are invested in a diversified stock and bond portfolio with the stock and bond split selected under the Portfolio Equity Allocation selection. The tool assumes that the stock portion is invested in a broad basket of securities covering the U.S. large cap equities market (proxied by the MSCI USA Index), and the bond portion is invested in a diversified portfolio of U.S. investment grade bonds, representing the entire U.S. rates and credit market (proxied by the Bloomberg Aggregate Bond Index).

Other investments not considered may have characteristics similar or superior to those that are identified in this tool. 

Longevity:

‘Longevity risk’, the risk that a retiree may outlive her savings, is one of the greatest sources of risk any retiree faces and can complicate retirement savings decisions.

To reflect the probability of being alive at a given age, the tool utilizes the Annuity 2000 mortality (life) tables, published by the American Society of Actuaries. While these tables project life expectancy until age 115, the tool is designed for use only up to age 95.

Risk Aversion:

Risk aversion relates to how retirees value the tradeoff between potential spending power (higher returns) for certainty of outcome (lower risk). The tool assumes that a user’s risk aversion translates into her Portfolio Equity Allocation selection on the Profile page. The tool default for this input is a moderate risk aversion and a ratio of 40/60 between stocks and bonds.

Long-term Capital Market Assumptions (LTCMAs):

LTCMAs refer to BlackRock's return, risk and correlation expectations for each asset class, which are published periodically by the BlackRock Investment Institute. (Correlation measures how asset classes move in relation to each other). The most recent BlackRock Investment Institute LTCMAs considered by the tool are the December 31, 2023 LTCMAs.

Within the tool, these return and risk assumptions are updated periodically and are incorporated into the tool in line with BlackRock’s proprietary LifePath Retirement Spending methodology. LTCMAs are subject to high levels of uncertainty regarding future economic and market factors that may affect actual future performance. LTCMAs can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. LTCMAs should not be relied on as a forecast or prediction of future events, and they should not be construed as guarantees as to returns that may be realized in the future from any investment or asset class described herein. Ultimately, the value of these assumptions is not in their accuracy as estimates of future returns, but in their ability to capture relevant relationships and changes in those relationships as a function of economic and market influences.

Asset Classes/Risk Premiums:

Risk premium is defined as the return above a very low risk investment in U.S. cash (represented by FTSE 3-Month Treasury Bill Index).

U.S. equities are based on the MSCI USA Index, which is designed to measure returns and risk associated with U.S. large cap equity related investments.

U.S. fixed income is based on the Bloomberg Aggregate Bond Index, which is designed to measure returns and risk associated with U.S. investment grade bond related investments.

Asset allocation and diversification strategies do not guarantee a profit and may not protect against loss. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities. 

 

[1] According to the Social Security Administration, the maximum possible benefit for an individual retiring in 2024 is $58,476 and represents the benefit for an individual with maximum-taxable earnings since age 22 and retiring at age 70. The tool allows users to input a value between $0 and $100,000.

 

RGDCH1024U/S-3951622