BlackRock Launches LifePath Spending Tool for DC Plans

The solution is designed to help retirees easily estimate retirement spending and better control the outflow of assets from defined contribution plans.

BlackRock revealed a new retirement income planning solution that relies on internal modelling and two participant inputs, age and current savings, to help individuals make a plan for the decumulation phase.

As the firm explains, the LifePath Spending Tool’s projections are based on BlackRock’s long-term capital market assumptions, including life expectancy. Using the solution, savers can “easily see a retirement spending estimate for the current calendar year, as well as track estimated retirement spending until age 95 and see the potential impact on savings over time.”

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The launch of the solution comes just a few weeks after BlackRock published its latest update to its Defined Contribution (DC) Pulse Survey. That research shows increased optimism among plan participants coming at the same time that plan sponsors are growing more concerned about the so-called “decumulation challenge.”

According to BlackRock’s research, the most commonly used retirement spending advice over the last thirty years was likely some variant on the so-called “4% rule”. In its simplest form, the rule suggests that retirees over a thirty-year period can sustainably meet their retirement income needs by investing in a 50% stock/50% bond portfolio and withdrawing 4% of their savings balance the first year of retirement as a baseline. The baseline would then be adjusted for inflation each subsequent year, researchers explain.

“There are a number of issues with the 4% rule, including current low bond yields rarely experienced during the period underlying development of the rule. We believe that the issues are more fundamental,” BlackRock warns. “To understand why, we need to step back and redefine the retirement income problem.”

Rather than rely on a simple 4% withdrawal rule, the new BlackRock model seeks to sustain the consumption pattern once labor income ceases (at retirement) and wealth and investment returns become the source for future spending. The model assumes labor income ends at retirement and makes assumptions about Social Security or pension income, which may be closer to the experience of the next generations of retirees.

“Viewed in this way, the retirement income solution can be defined as producing the income and returns needed to sustain retirement spending; minimizing volatility; and aligning asset withdrawals with mortality expectations,” researchers explain. “The culmination for managing all these factors, behind the scenes for investors, should be a smooth, uneventful ability to spend in line with the consumption curve.”

According to BlackRock, turning retirement savings into income is a three-part problem based on the savings balance, market returns and risks, and longevity. The latter two—returns and longevity—are difficult, if not impossible, for an individual to understand and solve on his or her own, BlackRock says. Hence the introduction of the LifePath Spending Tool.

“The tool is designed to provide information for retired individuals, 63 and older, about how to estimate retirement spending,” the firm explains. “The tool takes into account BlackRock’s long-term capital market assumptions and, based on an individual’s current age and savings balance, provides an estimated dollar amount and a percentage-based withdrawal for the current calendar year. It is assumed to be invested in a 40% equity/60% fixed income portfolio.”

The tool also provides a range of spending estimates depending on whether the markets are stronger or weaker than current expectations. Near-retirees and current retirees are encouraged to return to the tool annually to get an updated spending withdrawal estimate and a refreshed spending projection.

“The challenge of retirement spending has changed,” BlackRock concludes. “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.”

More information is available here.

Nearly Three-Quarters of Americans Value Guaranteed Income

Seventy percent believe their advisers have a responsibility to discuss guaranteed lifetime income products with them.

Seventy-three percent of people surveyed for the Guaranteed Lifetime Income Study from Greenwald & Associates and CANNEX said they view guaranteed income as a valuable addition to Social Security, up from 61% a year ago. The survey was conducted among 1,003 pre-retirees and retirees between the ages of 55 and 75 with more than $100,000 in household assets in February.

The survey found that two primary reasons why people value guaranteed income are to cover health care costs (cited by 54%) and to prevent running out of money (46%). Fifty-two percent said they view guaranteed income as a hedge against a market downturn.

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“The perceived need for guaranteed lifetime income products continues to rise with fewer retirees being able to count on pension plans,” says Doug Kincaid of Greenwald & Associates, who oversaw the survey. “In this year’s data, we found many respondents confident they’ll be able to maintain their lifestyle through their own projection of their life expectancy, but the less affluent and women, in particular, are concerned about their ability to meet their needs if they live beyond this. Other research has shown that more than half will wind up living longer than they expect.”

While only 17% of those with more than $1 million in assets are highly concerned about meeting their financial needs in retirement, for those with assets between $100,000 and $249,000, 43% share this concern. While 25% of those with a pension are concerned about outliving their retirement savings, this can be said of 38% of those without a pension. Greenwald & Associates said this is a key finding, as pension plans continue to be a thing of the past.

Additionally, 37% of women are highly concerned about outliving their savings, while only 22% of men share this concern. On average, people expect to live to age 85, and roughly 80% of people are confident they will have enough money to reach that point. In fact, 53% are highly confident they will have enough money until age 85. However, for those with assets between $100,000 and $249,000, only 43% have this high level of confidence, but for those with more than $1 million in assets, this rises to 74%.

Should they live five years beyond their expected longevity, only 38% are confident they will be able to maintain their lifestyle, and should they live an additional 10 years, this drops to 31%. The respondents indicated they expect a substantial drop in income when they retire, but that it will remain steady afterward. Roughly 40% of pre-retirees said they expect annual income of less than $50,000. Twenty-three percent expect income of $50,000 to $75,000, and 16% expect to receive $75,000 to $99,000. Less than 20% expect to receive more than $100,000 in retirement income.

While 25% expect their expenses will be higher in early retirement, 38% expect they will increase in later retirement. Fifty-three percent of respondents between the ages of 65 and 69 believe the value of their assets will grow in 10 years, as do 48% of those between the ages of 70 and 75. Only 19% and 13%, respectively, think their assets will be lower in value.

“Respondents are optimistic that market growth in their savings, along with a lower level of expenses, will enable them to maintain their quality of life in retirement,” says Gary Baker, president of CANNEX USA. “Given limited savings and rising costs, drawing down assets will be a necessity for most retirees, making the risk of running out of funds a question of time without lifetime income strategies.”

Evaluating guaranteed lifetime income products

Asked about the main benefits of guaranteed lifetime income products, 66% said it is the protection against longevity risk, peace of mind and making it easier to budget. As for the negatives, respondents said ease of understanding, and excessive terms and conditions of the contract.

Thirty-nine percent of respondents said they had heard about annuities from an adviser, while 23% pointed to financial institutions. Seventy-percent think their adviser has a responsibility to discuss guaranteed lifetime income products with them. If they don’t, the respondents would consider switching to another adviser. Among those with an adviser, 66% are highly satisfied with the advice, and when retirement income strategies are discussed, the level of satisfaction rises. Nonetheless, only 50% of those with an adviser have had a conversation about retirement income strategies.

Sixty-two percent said their adviser had said positive things about guaranteed lifetime income products and annuities, but 37% said their adviser’s assessment was either neutral or negative. They also said that media coverage of annuities and lifetime income products is largely negative.

“There are significant operational challenges the financial services industry still needs to overcome to broaden access to annuities, in addition to addressing negative perceptions around them,” Baker says. “The study shows that the conversation really starts and ends with adviser discussions.”

Among those who own a guaranteed lifetime income product, 63% said they are highly satisfied, and 73% said the product is highly important to their financial security.

Kincaid says that advisers need to consider each individual’s risk tolerance when working with them on selecting a guaranteed income product.



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