Cost of Sustainable Retirement Income up in 2014

The cost of generating retirement income increased over the last year, according to a new BlackRock analysis, but market gains have helped retirement savers stay on track.

The new analysis, “CoRI Retirement Indexes Analysis,” is based on BlackRock’s proprietary CoRI Retirement Indexes, which are designed to measure the estimated cost of future retirement income (see “BlackRock Debuts 10 Retirement Indexes”). The research also incorporates data regarding U.S. workers’ median income and retirement savings provided by the Employee Benefit Research Institute.

Researchers say the data tells a somewhat positive story about America’s retirement readiness, as those ages 55, 60 and 64 with median income and retirement savings are on track to replace as much as two-thirds of their on-the-job earnings each year in retirement from savings and Social Security payments combined.

“Our goal in creating this analysis is to further reinforce how essential it is for individuals to understand their retirement income need and goal, and to save and invest appropriately in seeking to generate the income they want in retirement,” explains Chip Castille, head of BlackRock’s U.S. Retirement Group.

According to BlackRock’s analysis, 55-year-olds with median levels of income and retirement savings are better positioned to achieve adequate income replacement in retirement compared with older workers. These workers have already saved enough to generate an estimated 69% of median workplace income after retirement when including projected Social Security payments. However, 64-year-olds with median income and retirement savings face a more daunting challenge, with enough saved today to replace only about 59% of their pre-retirement income, BlackRock says. Individuals age 60 with median income and retirement savings have the potential to replace about 64% of their income, the data shows.  

Researchers say these levels of retirement readiness are actually higher than expected, given that the CoRI Indexes indicate that the estimated cost of future retirement income has increased for investors ages 55, 60 and 64. For example, for someone age 55, every $1 of lifetime retirement income is currently estimated to cost $14.09 as of June 30, 2014. This is a 7.15% increase from a year ago, BlackRock says.

At the same time, because workers’ investments have benefited from a continued bull market over the past 12 months, researchers say the level of pre-retirement income investors may be able to generate after they quit working has stayed steady.

“With the S&P 500 up 22% year-over-year, investors may look at their retirement portfolios, see positive investment performance, and think they are doing quite well,” Castille says. “However, investors still have to be saving. Pure investment returns alone may not tell the complete picture when it comes to retirement preparedness.”

Castille says understanding how the cost of retirement income changes and how that may impact a worker’s retirement income stream “completely transforms the entire retirement conversation.”

"The reality for investors is that you can’t plan your future if you don’t know where you are today," adds Robert Fairbairn, global head of BlackRock’s retail and iShares businesses.

Additional findings from the BlackRock analysis show the youngest pre-retirees, those at or near age 55, are best positioned to close their projected income gap compared to 60- and 64-year-olds. For example, to reach the 80% income replacement rate typically recommended by financial advisers, BlackRock says a 55-year-old with median retirement savings ($263,755.84) and median income ($57,961.13) is likely to have an income-replacement gap of approximately 14%.

This is compared to a 64-year-old worker with median retirement savings ($251,142.49) and median income ($48,972.05), who would have a gap of approximately 26%, according to the analysis. As a result, many of these older pre-retirees are expected to work longer or attempt to cut their living expenses.

The BlackRock CoRI Retirement Indexes began tracking the estimated cost of future, cost-of-living-adjusted lifetime income as of June 28, 2013. The series, which now includes 11 fixed income indexes, specifically designed for individuals in the pre- and early-retirement years, use several factors, including interest rates and inflation adjustments, to generate estimated future retirement income costs (see “BlackRock Enhances LifePath Strategies”).

BlackRock says an individual can use the indexes to determine either how much estimated annual lifetime income their savings may provide beginning at age 65, or the appropriate level of savings they would need today to generate a desired amount of annual retirement income. More information on the indexes is available at