Cost of Deferred Retirement Income Has Climbed

The estimated cost of purchasing future lifetime retirement income for workers in their 50s and 60s climbed during the first quarter of 2015, according to BlackRock’s CoRI Retirement Indexes.

The CoRI indexes suggest long-term interest rates have started to level out from prolonged historic lows—a benefit to retirees hoping to address longevity risk via deferred annuities. BlackRock says the start of 2015 is again demonstrating how important it is for pre-retirees to keep in mind that retirement investment strategies are often sensitive to interest rate changes.

The good news from the Q1 2015 index results is that fixed-income markets gave most pre-retirees a small assist in closing the gap between their current savings and the retirement income they want, BlackRock explains. The bad news is that the estimated cost of generating income in retirement still rose faster than the value of retirement investments.

BlackRock reports the median nest egg for 55-year-old workers could generate only $16,252 per year starting at age 65—down from $18,422 at this time last year. The main reason for the drop year-over-year is lingering low interest rates, which have climbed some in 2015 on stronger economic data but continue to hover far below long-term averages. BlackRock finds the yield on the 10-year U.S. Treasury note fell a “whopping 28.94%” in the 12 months ended March 31, despite the fact that many forecasters anticipated rates to start climbing towards normal during that period.

The Federal Reserve has opened the door to raising short-term rates later this year, but BlackRock warns it is still unclear how many rate increases the Fed will enact this year, or how substantial they will be. Even more challenging to address is speculation that interest rates have been depressed for so long that it remains unclear whether a small uptick in the shortest-term rates would do enough to penetrate the longer-term fixed income markets, which are depended on even more by pension funds and other long-term investors.

BlackRock says rates matter to individual pre-retirees as well, because they play a critical role in determining exactly how much deferred retirement income will cost via the annuitization pathway. Long-term interest rates are one of the primary drivers of annuity pricing, and are looked to as a key indicator of macroeconomic vigor (or weakness).

BlackRock concludes that, despite the possibility of bond portfolio volatility and losses in the near term, increased rates will likely make annuities more affordable. Looking back, BlackRock says when the 10-year Treasury yield rose almost 20% in the second half of 2013, the CoRI Index 2023 level fell by 5.17%, meaning every dollar in deferred annual retirement income cost about five cents less.