Retirement plan sponsors, participants and many advisors often struggle to determine how much someone can safely spend in retirement – now, there’s an easy-to-use tool for that.
On Wednesday, BlackRock launched the LifePath Spending Tool, designed to help retirees estimate spending over the course of their lifetimes. The tool is initially being shared with retirement plan sponsors, but over time will be made available to the general public via BlackRock’s website.
The tool uses BlackRock’s long-term capital market assumptions and addresses longevity by factoring mortality probability into an extended spending forecast. By indicating their age and retirement savings, a retiree may immediately receive estimated current-year spending and spending over the course of a lifetime.
In a whitepaper accompanying the tool’s release, BlackRock notes that today’s retirees face three problems estimating their retirement income needs: 1. the failure of pensions and Social Security to replace income earned while working, 2. projected lower market returns and lower bond yields which may not support traditional retirement investing strategies, and 3. estimating longevity.
Currently, many retirees appear to carefully peg their spending equal to or just below their income to avoid drawing down their savings. In an analysis of data from the Employee Benefit Research Institute, BlackRock found that a plurality of retirees across different levels of wealth maintained their retirement assets, living only off of income from yield on capital, Social Security, pensions and labor.
BlackRock believes that historically buoyant equity markets, combined with a nearly 30-year bull market in U.S. fixed income, enabled retirees to avoid drawing down their savings. This lucky sequence for retirees over the past few decades impacts the outlook of today’s retirement savers and retirees who have more reason to worry about outliving their savings.
Moving forward, BlackRock believes that retirees will have to carefully strategize how they will spend down their retirement accounts, and these strategies may require moving away from the concept of leaving principal intact
LifePath delivers a long-term spending estimate for retirement savers aged 64 to 95, using a 40/60 portfolio as its assumption. The estimate includes withdrawal rates expressed in terms of percentages and dollar amounts. BlackRock says that the tool can be used to help investors decide when to retire, and how much income they’ll need to maintain their quality of life.