NEW YORK (MainStreet) — Saving for retirement can be an exercise in the abstract. For many investors, it all seems quite hypothetical. Put away as much as you can so that at some distant point in the future you can live on some adequate amount of money. Want to nail down the concept a bit more than that? Consider this: for a 55-year-old working as of December 31, 2014, it took $16.62 to generate $1 in annual retirement income beginning at age 65. And even with a rising stock market, that number grew more than 33% in the past year, up from $12.47 at the end of 2013, according to the BlackRock Cost of Retirement Income index (CoRI).
"The retirement-income cost rose even though strong equity returns bolstered retirement nest eggs for U.S. workers, with the median retirement savings portfolio for 55-year-olds increasing 14.07% to $280,035," writes Chip Castille, chief retirement strategist for BlackRock.
The culprit: the continued decline of long-term interest rates. Even though the bull market in stocks has ramped-up the returns of worker savings in IRAs and 401(k) accounts, the CoRI index computes income generated by mostly government and investment-grade bonds. The reason: while an investor might have a portion of his portfolio still invested in stocks during retirement, the income he will rely on during life-after-work is likely to be generated by such interest-based investments. And while experts have been predicting higher interest rates, yields on 10-year Treasuries fell nearly 30% last year.
"As a result, those workers’ median nest egg value of $280,035 could only generate estimated retirement income of $16,849 a year starting at age 65," Castille says. "What’s interesting (and counterintuitive) about that result: Even though the savings portfolio grew in value, it would be on track to generate almost $3,000 less in annual retirement income than the smaller nest egg 12 months ago."
Interest rates are bound to go up sooner or later, but in the meantime, pre-retirees are losing ground on their retirement income prospects, especially savers in their 50s and early 60s. While a ballooning investment balance today can breed optimism, savers will likely count on interest income in retirement. The analysis considers life expectancies, interest rates, annuity prices and inflation projections to determine the "price" today of a dollar of annual retirement income starting at age 65.
"These numbers have a sobering message: workers now need to increase their savings to generate the same retirement income that a smaller nest egg a year ago was positioned to provide in retirement," Castille says.
--Hal M. Bundrick is a Certified Financial Planner and contributor to MainStreet. Follow him on Twitter: @HalMBundrick