CoRI takes into account interest rates on fixed income investments, inflation and actuarial projections of the two measures over time. Longevity is also taken into account by CoRI, says Castille.
The recent dramatic increase in retirement costs are driven by interest rates, says Castille.
“As rates go down, as they have been over the past few years, the price of CoRI goes up,” Castille says. “Lower rates mean that an investor’s money doesn’t work as well, and the CoRI price movement captures that. When the U.S. 10 Year Treasury went from $1.80 to $1.40 after the Brexit vote, that was a huge drop, and so the CoRI prices went up.”
While CoRI does not consider equity valuations, retirees also have to cope with the rising cost of income-generating stocks and alternatives as interest rates sag. Exacerbating the retirement income problem, returns on the S&P 500 have tended to decline as the CoRI indexes rise.
“The long-term trend in rates has been downward, so the long-term trend in CoRI has been moving up,” Castille says. “In the three years since we introduced CoRI, the price of retirement income has gone up by 40 percent, and the S&P has only gone up about 20 percent. The moderate portfolios that were considered more appropriate for investors in or near retirement are up much less than that. The movement in retirement income cost is being under-reported.
“Imagine a world where you knew the value of your house but didn’t know anything about your mortgage, you just blindly sent checks to the bank and hoped for the best,” Castille says. “We’re in a similar situation here: Everybody knows what’s in their 401(k)s or their IRAs, but nobody knows the size of their liability.”