Hitting a retirement-income number should be looked at as a range, and not a single figure.
Retirement got more expensive this month.
The shock of Britain’s vote to leave the European Union sent investors running for the exits, too, so they gobbled up bonds and pushed yields lower.
Meanwhile, market analysts warned that stocks were poised for a downtrend given their recent run-up while earnings growth fell.
Before stock markets stabilized, the “cost” of future retirement income rose nearly 10 percent on the British vote, according to BlackRock, an investment-management firm that created retirement indexes that factor in current interest rates and inflation.
Cost of volatility
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This means that on those volatile days, a pre-retiree would see she would have to amass a nest egg 10 percent bigger in order to draw the same annual portfolio income as she did the week before.
A 60-year-old with $300,000 saved could expect her portfolio to generate $14,837 in annual income, beginning at age 65, the BlackRock CoRI Indexes showed early last week.
At its 52-week low last summer, the index was forecasting the same portfolio could be expected to generate $18,293 in annual income, a difference of nearly $4,000. Generally, the index produces an income figure that reflects what the lump sum could generate as an annuity at retirement. You can plug in your own numbers at www.blackrock.com/cori.
What’s the point in tracking such a widely fluctuating number? Precisely to get investors to realize that hitting a retirement-income number should be looked at as a range and not a single figure.
“(Pre-retirees) need to realize that the number is a moving target,” said Chip Castille, chief retirement strategist for BlackRock. “What they need today might be different in six months.”
Knowing that, Castille said, retirement savers can think about different options for closing the gap between what they want to spend and what they have as retirement gets closer.
If there is a persistently wide gap over time, they may adjust their expected retirement date, take on more investment risk or lower their expectations for portfolio income, for example. “It helps people get their bearings as to where they are with their goal,” Castille said.
Plenty of financial advisers urge savers not to pay much attention to market fluctuations, and particularly warn against bailing out of investments in the face of the kind of volatility markets have experienced recently.
Charles Corger, a financial planner in Bala Cynwyd, Pa., counts himself among those advisers. Even so, he said, periodically discovering and addressing a gap between a pre-retiree’s current savings and what it’s likely to generate in retirement income is a good thing.
“We don’t react to short-term market movements but we don’t leave our heads in the sand, either,” he said. When investments grow by certain percentage targets, the movement triggers a rebalancing into asset classes that have been harder hit, he says.
And if the so-called “gap to goal” gets too wide, he said, he talks with clients about all the levers Castille mentioned.
“We absolutely talk about taking on more risk if that’s appropriate. With interest rates as low as they are today, it’s critical for people in their 50s and beyond, particularly, to have the correct asset allocation.”
Equally important, he says, is getting clients to embrace a total-return income strategy, which means taking systematic withdrawals on a portfolio invested for capital appreciation as opposed to living on dividends and bond income and avoiding dipping into principle.
“Increasing equity exposure is a difficult conversation because there’s no free lunch,” he said, referring to the risk inherent in a stock-heavy portfolio. He mitigates the risk by having buckets of risk-free cash parked for short-term expenses.
“Keep costs low and diversify. It’s still the best way to get it done,” he said.