Despite double digit returns for equities last year, the cost of retirement income for 55-year-olds rose dramatically, according to BlackRock’s CoRI indexes.
In 2014, the estimated cost of lifetime income rose 33.8% for 55-year-olds who expect to retire at age 65, as Treasury notes fell 28.6% following a decline in long-term interest rates. BlackRock does not project much improvement this year.
BlackRock’s CoRI indices are designed to estimate how much an investor would need to have saved today to generate each dollar of annual income in retirement, starting at age 65. To generate $1 in income at the end of 2014, a 55-year-old needs to save $16.62. That’s up from $12.47at the end of 2013.
People at retirement age fared better, though. So advisors who focus only on the size of a client’s account are not seeing the entire picture.
Remember when all experts were predicting doom and gloom for portfolios with long-term bonds when the inevitable rise in interest rates occurred? Maybe the current interest rate environment is the new normal, following the same pattern as after the Great Recession.
So along with plan sponsors’ concerns about the liability of offering retirement income products — which have helped keep adoption very low — until the DOL issues some kind of safe harbor, costs will remain a concern as long as interest rates remain low.
