If you have ever played around with an online retirement calculator you probably understand that play is exactly what it is. You end up guessing at inputs, like the inflation rate, your future income tax rate, how long you’ll work and live, and how much you’ll be able to save.
In the end, you either give up or arrive at a highly suspect conclusion. Good calculators are out there, including ones at CNNMoney, AARP, and T. Rowe Price. But most folks don’t have the information they need at hand or the patience they need to find it and complete the task effectively.
A new tool from BlackRock, the world’s largest asset manager, takes aim at these shortcomings and succeeds in key ways: it’s quick and easy, and as accurate in what it attempts to do as any financial planning tool you’ll find. BlackRock unveiled its CoRI tool with a lot of fanfare on Wednesday, using terms like “revolutionary” and “new paradigm.”
Some 45% of workers simply guess at how much they’ll need to accumulate for retirement, according to the Employee Benefit Research Institute 2013 Retirement Confidence survey. “The announcement we’re making today is designed to take the guesswork out of that very important calculation,” said Rob Kapito, president of BlackRock.
In just seconds, an individual within 10 years of retirement can determine how much guaranteed lifetime annual income their nest egg will provide or, alternatively, how much they need to save to reach an income goal. This tool removes one of the biggest planning obstacles to emerge since traditional pensions began to disappear three decades ago and individuals were left to save on their own and later figure out how to make their savings last.
CoRI is an index that represents exactly how much it takes today to guarantee $1 of income when you retire. Plug in your age to get your index level. Then plug in your savings total to find out how much income that will generate at age 65. It’s that simple. Here’s an example:
At age 57 the index is $14.15, which is the dollar amount it takes today to generate $1 of annual income at age 65. This means a 57-year-old with $500,000 will be able to buy $35,336 of guaranteed annual income in eight years. It also means that a 57-year-old who wants, say, $50,000 of annual income at age 65 would need to save $707,500.
The index changes on a daily basis, reflecting a bunch of factors like inflation and interest rates. Today your nest egg might indicate $75,000 of annual income in 10 years but next month it might indicate $72,000 or $78,000. The figure could rise or fall by a third over the course of 10 years. It all depends on the changing economic factors that determine the daily index level.
Individuals may find the volatility off putting. But BlackRock says it is inescapable; the index volatility represents the actual changing nature of how much future income your assets will buy and thus clarifies for all what planners have long known: guaranteed retirement income is a moving target. With the CoRI index you can watch your target and adjust as needed.
The retirement income planning tool is just the start. In coming months BlackRock will roll out a series of bond funds pegged to the index. The idea is that if you buy a CoRI-based fund today you will secure a certain level of income at age 65. You could do that through a deferred annuity too. But BlackRock says its funds will be much less expensive and have the added benefit of keeping your funds liquid to the day you start receiving income.