Take a dollar out of your wallet and have a good look at it.
What's the first thing that comes to mind? Most likely, it's what
that dollar will buy, although admittedly, that's not very much.
But even if a dollar doesn't buy what it used to, we still think
of a dollar in terms of purchasing power.
But what if there was another way to think of a dollar? What
if the way we should think about a dollar is not what it
, but what it
- and more importantly, what it will cost at some point in the
future? If we can reasonably estimate the future cost of a
dollar, would it change the way you plan for retirement?
A Dollar Today, A Dollar Tomorrow
Before we can answer these questions, let's explain what we
mean by the cost of a dollar by reverse engineering the problem.
If you went back twenty years to 1993, what would be the cost of
earning a nominal dollar in 2013?
It's a complex problem to solve. You would have to account for
inflation, but you should be able to offset some of its corrosive
effects by leveraging interest rates and investment returns. If
you had an actuarial frame of mind, you might even negotiate a
discount based on the likelihood that you would live until 2013
to collect your dollar.
If this sounds like the thinking that goes into pricing
annuities, it's intended to. Insurance companies are in the
business of pricing (and delivering) future income. If we can
harness some of the insights of their pricing models and make
them easily available to individuals, we would have a powerful
new way of helping people understand how their current savings
might support their future spending.
From Retirement Savings to Retirement Spending
Most people, as they near retirement, look at their savings
balance and try to determine how long they can make it last.
That's a difficult thing to do as an individual, in large part
because we don't know how long we are going to live. Insurance
companies, by contrast, have the advantage of pooling together
large numbers of people and use mortality tables to predict
BlackRock has introduced a series of indexes and an online
tool designed to help individuals solve that problem.
Currently, there are ten BlackRock CoRI™ Retirement
Indexes, one each for people from the age of 55 to 64 that
estimate on a daily basis the cost of one dollar of annual
lifetime income beginning at age 65. For instance, a CoRI Index
Level of $16.42 means that you should have $16.42 today for each
dollar of annual lifetime income you'd like to begin receiving at
age 65. The index levels are calculated using many of the same
real world factors used by annuity companies, including life
expectancy and inflation adjustments. (For more details, check
The CoRI Indexes may sound complicated, but they are actually
fairly simple to work with and understand.
CoRI, our online tool
, lets you explore the Indexes by easily translating between a
lump sum and estimated annual retirement income. While the CoRI
Indexes are designed specifically for people within ten years of
turning 65, it can be an eye-opening education for anyone to go
to the tool and plug in numbers.
What the CoRI Indexes give you is a new way to think about
retirement planning. They provide an intelligent estimate about
the cost of a future stream of dollars, or what you may need to
save to produce a desired future lifetime income. Why that's
important and how you can use this insight is something that I
will be returning to in future blog posts.