Cost of Purchasing Annuities Has Spiked

"Pre-retirees now need to plan on having nearly 10% more in retirement savings than before, in order to buy the same level of deferred income,” BlackRock warns.

Correlation does not always imply causation,  especially in finance, but you can count among the peripheral consequences of ‘Brexit’ a serious spike in the price of  future retirement income.

In the wake of the UK’s surprising decision to exit the European Union, global market volatility has spiked, along with the estimated up-front cost of purchasing deferred annuity income. 

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This is according to BlackRock’s CoRI Retirement Indexes, which enable investors to estimate how much annual retirement income their current savings could generate if converted to annuities commencing payments at age 65.

“Since the ‘Brexit’ vote on June 23rd,  the CoRI indexes have spiked upward by nearly 10%, meaning that pre-retirees now need to plan on having nearly 10% more in retirement savings than before, in order to buy the same level of deferred income,” BlackRock warns.

The CoRI Indexes are backed by the firm’s analytics and enable an investor or adviser to calculate either of two critical figures: how much estimated annual income an investor’s savings will provide throughout retirement, or conversely, the level of savings an investor needs to generate a desired amount of annual income throughout retirement. However one cuts the latest data, it doesn’t look good for already cash-strapped investors.

The most recent movement in the CoRI 2025 Index, for example, shows a clear upward trend since June 23, while the S&P 500 equity index remained essentially flat, thanks to stronger performance over the last few trading days. But, according to BlackRock, the CoRI and the S&P 500 moved rapidly in opposite directions for an uncomfortable period following the Brexit vote, “meaning investors are facing lower returns from the S&P 500 at the same time that the cost of retirement income is getting dramatically more expensive.”

Additional findings and past results from the BlackRock CoRI Indexes are presented here

Paper Offers Roadmap for Implementing Auto Features

Discussions with plan sponsors also reveal the benefits to plan sponsors of utilizing automatic enrollment and automatic contribution escalation.

A new publication by the Defined Contribution Institutional Investment Association (DCIIA) highlights several ways in which employers may benefit when they thoughtfully employ automatic plan features in their defined contribution (DC) retirement plans.

Discussions with DC plan sponsors reveal key benefits to the employer include improved employee satisfaction and engagement, as well as the ability to negotiate lower fees, including reduced recordkeeping and asset management fees due to greater plan participation. In addition, empowering employees to retire as planned not only benefits the employee but also facilitates workforce planning efforts.

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In some cases, DC plan sponsors reported that a benefits program which includes a generous stretch match can help attract and retain employees. Some plan sponsors report reduced rates of turnover, resulting in lower training costs, which in turn lessens the negative impact of lower productivity from newer employees.

“There have been a number of excellent guides published enumerating how ’autos,’ such as auto enrollment and auto contribution escalation, really help employees save for retirement. We thought it would be useful to illuminate the benefits that accrue to employers who utilize automatic features as well. We hope that plan decision-makers find this work helpful when discussing plan design alternatives,” explains Mikaylee O’Connor of RVK, Inc., a co-author of the paper.

The whitepaper also shares a framework for how a plan sponsor might implement such a program over a period of years. “Our experience is that when plan sponsors implement auto features, it is something of a process. Plan sponsors often start off slowly—for example, with low default contribution rates and new-hire-only auto enrollment. Then they gradually increase default contribution levels and may sweep in existing hires,” says Lori Lucas of Callan Associates, DCIIA’s Chair and co-author of the paper. “To take the guesswork out of the equation, we have developed a roadmap that may help plan sponsors design and implement a thoughtful and impactful offering that addresses their specific plan needs in a measured and cost effective manner.”

The paper is here.

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