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.”
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.