A quarterly analysis from BlackRock finds the cost of
purchasing lifetime income units increased significantly in the last 12 months,
putting pressure on pre-retirees planning for life after work. A sharp rise in
lifetime income costs means many workers in their 50s and early 60s are less
financially prepared for retirement than they were 12 months ago, despite 11%
gains in equity markets over the same time period. Even a strong 14% return for
the average 55-year-old retirement investor examined by BlackRock couldn’t keep
pace with the relative increase in lifetime income costs.
Chip Castille, BlackRock’s chief retirement strategist, says
markets in 2014 were mostly friendly to investors at the retirement horizon,
despite some volatility. Portfolios held by 64-year-olds grew an average 19% in
2014 and outpaced the cost of future lifetime income, which rose a more modest
11%. BlackRock explains that, with just over $282,000 in median lump sum
savings, this group of late-career workers has the equivalent of slightly more
than $12,000 in estimated annual retirement income.
Castille says the CoRI Retirement Indexes demonstrate
ongoing shifts in annuity and income product markets, as well as the impact of
wider market moves on retirement-specific portfolios. The indexes offer investors ages 55 to 64 a
daily estimate of the “price” today of a dollar of annual retirement income
starting at age 65. The CoRI Indexes, composed largely of U.S. government and
investment-grade bonds, use current interest rates, annuity prices, inflation
expectations, life expectancy and other factors to set the daily price
estimates.
The final quarterly CoRI analysis for 2014 shows that, for
workers around age 55, a dollar of estimated annual retirement income would
have cost $12.47 a year ago. Twelve months later the cost is $16.62. As a
result, workers’ median nest egg value of $280,000 could only generate
estimated retirement income of $16,849 a year starting at age 65, the analysis
shows.
BlackRock says the main factor behind the increase in
lifetime income costs was the continued slump in interest rates. The last year
saw yields on 10-year U.S. Treasury notes fall “a staggering 28.62%,” the
analysis explains. Jeffrey Rosenberg, BlackRock’s chief investment strategist
for fixed income, adds that predictions of rising rates from many investment
experts in 2014 did not play out.
The firm notes that the BlackRock 2015 Outlook predicts that
“long-term interest rates may inch up this year,” but BlackRock expects rates
to be low for some time to come.
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