BlackRock officials said CoRI indexes will allow pre-retirees to estimate their lifetime income based on what their current assets will generate once they turn 65. Here’s an example from the BlackRock CoRI Web site. The CoRI 2018 index is 16.50 today, Castille said. “That means if I am going to turn 65 in the year 2018, that for every dollar of annual lifetime income I want, I should have $16.50 cents. This acts like a forward annuity.”
So if a pre-retiree is looking for $100,000 of annual income, he or she needs to invest $1.65 million today. “This a fast way of getting a handle on your retirement needs,” Castille says. He added that bond index approach is unique and the company is applying for patent protection on the CoRI funds.
What could go wrong for the retiree?
There is no guaranteed return for CoRI funds, the money manager said.
“The CoRI funds,” according to a BlackRock statement, “may engage in active and frequent trading and may experience high portfolio turnover. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, their is a corresponding decline in bond values. The CoRI funds may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates.”
Another potential problem: The funds, which are not guaranteed, will contain an initial cost of living adjustment of 2.5 percent that can be changed each year. Castille conceded that, in the case of a sudden spike of inflation, that funds’ performance could have problems generating sufficient income for some clients. Nevertheless, he added, in most cases, the funds will offer either sufficient income or the liquidity to move on to another investment that will enable pre-retirees to reach their goals.
How expensive are these funds?
Castille said the numbers, which he didn’t immediately have, will be competitive with bond index funds.
Investors can stay in a CoRI funds for up to 10 years after an investor turns 65, taking distributions as part of one’s retirement plan. Once an investor reaches the year in which he or she turns 75, the fund will be liquidated. The remaining assets are returned to the investor.