We tend to think about retirement, naturally enough, in terms
of saving. And as we get closer to the day we plan to retire, we
start to think about retirement spending - or at least we should.
But a disconnect happens for most people when they try to match
what they have saved to what they think they'll need to cover
their living expenses in retirement.
The reason is that throughout our working lives, income and
spending are paired together. We know how much we make, and
therefore we know that our spending should be equal to or
(preferably) less than our income. When it comes to retirement,
relating the lump sum in our savings accounts to spending is
neither simple nor clear.
How Much Dough for a Cup of Joe?
Here's an example: What if I told you that $9,701 for a cup of
coffee is a good deal? Before you decide I'm crazy, consider this
Let's say you are 55 and one of your favorite things to do on
weekends is walk to your local coffee shop, buy a large cup and
chat with friends. When you think about retirement, which you
plan to do at 65, you imagine doing this every day. How much will
that cost? Let's assume that today your coffee costs $1.95 per
cup. And for simplicity's sake, let's remove inflation from the
equation and assume the price of your cup will not change. That
- Each year of coffee will cost $711.75.
- Ten years of coffee will cost $7,117.50.
- If your retirement lasts 30 years, you will eventually
Fortunately, you don't need all $21K at once. But how much do
you need to save before you retire to fund your daily cup of
coffee? You could use any number of financial tools to
calculate the rate of return on a given savings amount and a
drawdown rate that may deliver $711.75 a year.
I did something simpler; I used
. (Full disclosure, it's a BlackRock tool.) If you are 55 to 64,
you can check CoRI daily for the estimated cost of a dollar of
annual lifetime income beginning at age 65. (Check the CoRI
if you are interested in how the tool works.) Let's say based on
your age of 55, today's estimated cost per dollar of future
income (beginning at age 65) is $13.63.
So if I multiply the estimated cost ($13.63) by the
approximate yearly income needed to buy coffee ($711.75), I find
the annual income I need to buy my daily coffee in retirement
would cost an estimated $9,701 today. (The figures provided here
are for illustrative purposes only, assume no other variables,
and are subject to change over time.)
This "translation" helps in two ways. First, estimating the
cost of retirement income (by using CoRI or some other method)
helps you estimate the future income your savings may produce,
and that in turn lets you measure your estimated income against
your projected retirement living expenses. That exercise helps
you look at your retirement readiness in much the same way you
measure your current spending against your paycheck.
The second way it helps is that you start to think about
retirement income (from whatever source) as a "cost", something
you "buy". And that may change how you think about retirement
saving. Rather than putting money aside and hoping it is enough,
you can now think of saving as buying something today that you
will use tomorrow. And that subtle shift can help you set savings
goals based on the income you think you'll need in
Chip Castille, Managing Director, is head of the BlackRock
US Retirement Group. You can find more of his posts
The CoRI tool does not guarantee future income or protect
against loss of principal. Although the CoRI tool provides an
estimate of the amount of money you need today for every dollar
of annual income you want in retirement, this estimate is not a
guarantee. A number of factors may contribute to variations in