Low Rates Still Trouble Retirement Income Purchasers

A quarterly update from BlackRock shows estimated cost of future retirement income rose slowly but steadily in the third quarter.

The latest update of the BlackRock CoRI Retirement Indexes, which offer a proxy for the cost of purchasing delayed lifetime income annuities, shows retirement income costs increased modestly in the third quarter of 2015. 

BlackRock says those with savings in 401(k)s and individual retirement accounts (IRAs) saw lower growth during the quarter than earlier in 2015, as well as stronger market volatility. Other factors challenging retirement investors include the fact that long-term interest rates have remained low, despite more than a year of pundit predictions that rates will soon start to go up.

Compared with this time last year, the CoRI indexes show that for a 64-year-old, the median retirement savings level is up 12.22%, yet retirement income purchasing power has only seen a corresponding increase of 9.63%. For those age 55 the median savings level is up 6.81% over the last year, but future income purchasing power is actually down 0.19%. The gaps arise from the fact that different fixed-income investments will have to be made today for a 55-year-old purchasing delayed income that will be collected starting at age 65 versus what is needed for a 64-year-old.  

The main contributor to the slower growth in retirement income purchasing power compared with median savings level is the fact that long-term interest rates have remained lower than expected, BlackRock says. Currently it costs about $18 to gain $1 of additional annual lifetime income starting at age 65, as measured by the CoRI 2020 Retirement Index.

More information and past index results are online here.