A mixed bag: Retirement spending up for some, down for others

Determining how much clients should save today to secure a comfortable and lasting retirement income can be a tricky business. With so many factors at play — interest rates, inflation, stock market volatility, changes to the tax code, among other variables — applying conventional retirement planning formulas may no longer be adequate.

One measure that may prove useful to advisors’ retirement planning toolkit comes from BlackRock. The investment management firm’s CoRI Retirement Indexes provide a benchmark against which investors can measure retirement income objectives.

The indexes estimate the current “price” of $1 of retirement income starting at age 65. Composed mostly of U.S. government and investment-grade bonds, the indexes base their estimates on multiple factors, among them life expectancy, forecasted inflation, interest rates and other variables.

And what does Blackrock conclude from the data? In a new report, the company shows that retirement spending power improved for some, but not all, in or near retirement.

Between year-end 2014 and the close of 2015, The CoRI indexes identify a 4.41 percent rise in retirement spending power for individuals age 55. But spending power fell by 6.4 percent for 60-year-olds. And for those just shy of retirement, 64-year-olds, retirement spending power edged up a modest 0.74 percent.

On a cost basis, the trend was uniformly down. The estimated cost of generating annual income in retirement from savings dipped 4.05 percent for 55-year-olds, 2.14 percent for 60-year-olds and an eye-popping 7.39 percent for 64-year-olds relative to year-end 2014.

Why the declines? The report flags a rise in long-term interest rates.

“The 10-year Treasury yield curve climbed 4.6 [percent] Dec. 31, 2015, from the end of 2014,” the BlackRock report states. “If those rates fall further this year, pre-retirees could see their future spending power go even farther.”

“Unfortunately, the median value of savings didn’t keep up,” the report adds. “The median nest egg was virtually flat as of Dec. 31, 2015, compared with a year ago for 55-year-olds. And it fell significantly for pre-retirees at older ages with balances in both 401(k)s and individual retirement accounts…”

To analyze estimated retirement income for workers at ages 55, 60 and 64, BlackRock used data from the Employee Benefit Research Institute (EBRI). The Washington D.C. research organization tracks U.S. retirement savings by age for workers invested both in 401(k) plans and also IRAs.

With that data and median income from Dec. 31, 2015, EBRI modeled quarterly projections of investments and income. BlackRock combined that data with the CoRI Indexes to estimate how much income pre-retirees are positioned today to potentially generate from their savings starting at age 65.