Why Determining Retirement Readiness Doesn’t Have to Be … · 2018. 4. 20. · Why Determining Retirement Readiness Doesn’t Have to Be Complicated ... 63 CoRI Index 2016 ^CORI2016

Why Determining Retirement Readiness Doesn’t Have to Be Complicated

September 2014

Proprietary and ConfidentialThis material may not be distributed beyond its intended audience

Stephen Bozeman, DirectorSenior Product Specialist, DC GroupBlackRock, Inc.

What is the investment problem?

Historically the defined contribution (DC) industry has focused on accumulation, through savings and asset growth. Today the focus is shifting to participants’ retirement income needs.

Use of auto-enrollment, auto-escalation, and company match

features

Challenge: Participants struggle with asset allocation

Product Design

Asset Allocation

Challenge: Participants typically

don’t save enough

Plan Design

Savings

Challenge: Participants find the

transition from accumulation to decumulation difficult

Plan + Product Design

Retirement Income

Adoption of professionally managed investment solutions like

target date funds (TDFs)

Barriers are high and information is low, leaving participants in need of a simple, actionable framework to make savings/income translations

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Retirement income: What experience do individuals want?

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BlackRock means BlackRock, Inc. and its affiliates( collectively, ”BlackRock”)1. BlackRock Annual Retirement Survey 20122. BlackRock Annual Retirement Survey 2013

Individuals prefer a reliable income stream in retirement1:

Individuals are also concerned with maintaining flexibility1:

Individuals would benefit from savings and income translations2:

…of workers would be encouraged to save more if told how their retirement savings “translates” into retirement income

Research has shown that pension schemes that define the income benefit have been associated with successful retirement

Today’s investors are looking for solutions that provide a high degree of clarity around retirement income, but preserve flexibility about how to secure that income when they are ready to retire


Many obstacles have deterred or prevented plan sponsors from implementing retirement income solutions

In 2007, BlackRock developed a target date fund series that combined a growth strategy and a guaranteed lifetime income component.

LRI replaced the fixed income allocation with a fixed deferred annuity; the annuity would have been made available through a group contract with a leading insurer and BlackRock would have monitored pricing relative to “fair value”

The fund was designed to automatically buy annuity units during the accumulation phase such that at retirement, about half the assets would be invested in the income sleeve, alongside equities and real assets in seeking the potential for continued growth and inflation protection

The participant could see not only how much was invested in the fund, but also how much was represented by a lifetime income stream; Once the fund matured, the participant’s interest in the annuity would have rolled to an individual retirement annuity

Under this structure, the participant did not have to make a decision about how much of their savings to annuitize; it was done automatically, with partial Annuitization providing flexibility in their consumption ability in retirement

Case Study: LifePath Retirement Income (LRI)

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The LifePath Retirement Income strategy is hypothetical and conceptual. The information contained in this presentation is provided for illustrative purposes only.Annuity payments would be subject to the claims-paying abilities of the insurance company.


Case Study: LifePath Retirement Income (continued)

What were the key benefits?

While plan sponsors were enthusiastic about the experience LRI could offer to participants, the product was never implemented for reasons that reflect the challenge of lifetime income products in the DC market:

While plan sponsors and participants may value a guarantee, BlackRock found that guaranteed income products and structures typically come with features that plan sponsors and participants don’t like.

Partial annuitizationSome ability to customize income benefit

Automatic asset allocationGrowth, inflation protection, income accrual

Increased certainty about income

Familiar institutional collective trust funds

Why was it never implemented?

Liquidity during the accumulation phase

Uncertain fiduciary implicationsPlan sponsors had concerns about single insurer risk and establishing a potentially ‘lifelong relationship’ with their participants

Implementation complexityRecord keeping platforms are not typically equipped to report a guaranteed income benefit without an associated technology build

Portability concernsInsurance-based products frequently offer limited portability or ability to recreate benefits outside of the plan

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The LifePath Retirement Income strategy is hypothetical and conceptual. The information contained in this presentation is provided for illustrative purposes only.


How Old Do You Turn in 2014?

Your CoRIIndex Ticker

Your CoRI Index Level

65 CoRI Index 2014 ^CORI2014 $19.84

64 CoRI Index 2015 ^CORI2015 $19.60

63 CoRI Index 2016 ^CORI2016 $18.85

62 CoRI Index 2017 ^CORI2017 $18.14

61 CoRI Index 2018 ^CORI2018 $17.45

60 CoRI Index 2019 ^CORI2019 $16.76

59 CoRI Index 2020 ^CORI2020 $16.08

58 CoRI Index 2021 ^CORI2021 $15.45

57 CoRI Index 2022 ^CORI2022 $14.87

56 CoRI Index 2023 ^CORI2023 $14.25

55 CoRI Index 2024 ^CORI2024 $13.66

What are the CoRITM Retirement Indexes?

So what does this mean?

By observing the Index that corresponds to the year one reaches 65, an investor will have a clearer understanding of how today’s retirement savings could translate into estimated future lifetime income.

CoRI Index levels are subject to change over time and are shown for illustrative purposes only. Past performance is not indicative of future results. Indexes are unmanaged and one cannot invest directly in an index.Index levels are as of 7/3/2014. Screen shot is for illustrative purposes only. Data is as of 7/3/2014 (Source: Google).

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A 60 year old investor would need approximately $16.76 saved today for $1 of cost of living-adjusted, annual lifetime income beginning at age 65.


A suite of U.S. bond indexes that seek to track the estimated cost of $1 of future, cost of living-adjusted annual lifetime income starting when an individual turns 65.

Index Lifecycle

Designed to help provide a flexible, actionable way to benchmark retirement income goals and risks over the critical pre- to early retirement periods:

Currently there are 11 indexes available for individuals from age 55 – 65.

Each index will be available until age 75, i.e. 10 years beyond the year included in the index name.

Age 55 Age 65 Age 75

Example: Index 2023

IndexInceptionJune 2013

●

ReferenceYear

June 2023

●

Index TerminatesJune 2033

●From age 55 to 64, the index seeks to track

the estimated price of a fixed immediate annuity starting when an individual turns 65

(i.e. the cost of future lifetime income)

At 65, (i.e. the year included in the index name) the index level is designed to

converge to the estimated median price of a fixed immediate annuity

From age 65 to 75, the index seeks to track the estimated current price for a

fixed immediate annuity (i.e. the current cost of lifetime income)

For illustrative purposes only.

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How is it constructed?

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Constructed according to a proprietary, two-part process and executed by a third party, independent calculation agent.

Step 1: Calculate a target index level• A target level is calculated for each index based on objective, real world factors that affect the market price of lifetime

income at retirement, including the effects of inflation.

• These factors are then hedged and discounted to estimate the cost today for a dollar of annual lifetime income beginning at age 65, i.e. an individual’s “retirement liability,” represented as a series of future cash flows.

$51+ $9.50

- $28

- $19.50

+ $3 $16

$0

$10

$20

$30

$40

$50

$60

$70

Cash Flows InflationExpectations

Mortality Adjustment Interest RateAdjustment

Longevity Pool RiskPremium

Final CoRI Indexlevel

1. For illustrative purposes only and subject to change. Attribution reflects CoRI Index 2018 target price level as of 7/31/2013; Source: BlackRock

Components of a CoRI Index level1


How is it constructed (continued)?

Step 2: Build index bond portfolio

• Next we translate the liability cash flows estimated in Step 1 into a bond portfolio that is designed to reflect the characteristics of these cash flows

• Hence by design, the mix of U.S. corporate and government bonds and U.S. Treasury STRIPS that constitute each index is intended to move in concert with the value of the corresponding lifetime income price target calculated in Step 1

Cash Flows

Set Portfolio Parameters1

Key metrics include:Duration

Spread DurationKey Rate Durations

Spread Key Rate Durations

Identify portfolio characteristics required to match estimated

retirement income liability:

Cash Flows

Filter Investment Universe1

Liquidity: Exclude bonds with < $500

million outstanding

Credit Quality: Investment grade, U.S. dollar-

denominated bonds

Add U.S. Treasury bonds and U.S. Treasury

STRIPS

Exclude all bonds with embedded options

Maturity:Exclude securities with < 2

years to maturity

Seniority:Include only senior,

unsecured debt

Rules-based approach is employed to allocate a set of bonds to track the attributes

of the target:

1. For illustrative purposes only. Description is provided to serve as a general summary and is not exhaustive. Investment process is subject to change.

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How is it constructed (continued)?

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CharacteristicsNominal yield (%) 3.85

Weighted avg life (yrs) 22.13

Effective duration (yrs) 15.45

Top 5 IssuersUS Treasury 66.63%

Verizon 2.88%

General Electric 1.23%

Comcast 1.15%

Goldman Sachs 1.00%

Sector breakdown Quality breakdown2

40%

27%

21%

3%9%

U.S. TreasuriesU.S. Treasury STRIPSIndustrialsUtilitiesFinancials

67%

18%

15%

AAA or aboveABBB

1. For illustrative purposes only and subject to change. Indexes are unmanaged and one cannot invest directly in an index. Source: BlackRock as of 3/31/14.2. The index itself has not been rated by an independent rating agency. Credit quality ratings on underlying securities of the index are received from S&P, Moody’s and Fitch and

converted to the equivalent S&P major rating category. This breakdown is provided by BlackRock and takes the median rating of the three agencies when all three agencies rate a security; the lower of the two ratings if only two agencies rate a security and one rating if that is all that is provided. Unrated securities do not necessarily indicate low quality. Ratings and portfolio credit quality may change over time.

• The set of bonds is selected with the objective of an aggregate return that approximates the estimated cost of lifetime income beginning at age 65. The bonds that constitute each index and their aggregate performance are published on a daily basis.

• Because both the liabilities that are being modeled (Step 1) and the bonds within each index (Step 2) are decreasing in tenor/maturity each month in a similar fashion, turnover of each index portfolio should be relatively low over monthly rebalancing periods.

Sample Characteristics: Index 20181


Evaluating the benchmark

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1. A CoRI Index is not, and does not represent, a guarantee of any kind. Its returns do not reflect the fees, expenses and cost that may be associated with an annuity or any other retirement income product that an individual may purchase, or any assumption that such a product will be available for purchase at the time of retirement.

2. Sources: BlackRock, Barclays and Yahoo Finance; Past performance is not indicative of future results. Indexes are unmanaged and one cannot invest directly in an index.3. Observed market prices were sourced from Cannex and refer to a single premium immediate annuity (SPIA) at age 65 with no embedded options, averaged across genders

and including a 2.5% annual cost-of-living adjustment.

Designed to track both increases and decreases in the estimated cost of lifetime income, eventually converging to the median price of an immediate annuity at age 65, i.e. the year in each index name1.

This means that these Indexes can help provide an actionable benchmark to track savings against estimated retirement income, even as the market goes up or down and the cost of future income shifts.

The CoRI Index 2014 landed comfortably within the range of market annuity prices, at 1.5% above the median as of June 2014.3

The highest and lowest priced annuities fell ~7% and 4% from the median, helping to support that the CoRI Index 2014 worked as designed.

Importantly, the CoRI Index price was slightly higher than the median, meaning an investor could potentially buy more lifetime income than the amount estimated by using the CoRI Index.

Example: Daily Price Comparison2


Portfolio Planner:Calculator:1 2 3Translate between retirement savings account balance and estimated lifetime income quickly and easily.

$1 millionsavings

~$60,096annual lifetime

income

CoRI Index 2019 level

$16.641x

Help investors and their advisors in new, actionable ways

Monitor investment performance relative to retirement income-oriented outcomes over time2.

Benchmark:

Design retirement investment plan based on specific income and savings goals.

Design a strategy to help close the gap:

?

Investor Example1:

Age: 60

Account Balance: $1,000,000

Retirement Income Goal: $70,000/yr

CoRI Index 2019 Level1: $16.64

Retirement Income Shortfall [$70,000 – ($1,000,000/$16.64]

$9,904/yr

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CoRI Index levels and account balances are subject to change over time and are shown for illustrative purposes only. Past performance is not indicative of future results. Indexes are unmanaged and one cannot invest directly in an index.1. Index level as of 4/23/2014 (Source: BlackRock). Data shown does not represent an actual investment or account. 2. Daily index levels for the CoRI Index 2018 10/15/2013 – 4/15/2014. Data shown does not represent an actual investment or account.

Account Balance: $1,000,000Annual Retirement Income: ~$62,893

1

Account Balance: $1,050,000 Impact to Annual Retirement Income: (~$2,305)

2


Tool Example

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Sample screen shots are for illustrative purposes only. Data is as of 7/3/2014. CoRI Index levels are subject to change over time. Data shown does not represent an actual investment or account.1. This example is based on a current retirement savings multiple of 10x a $65,000 salary, with a 100% income replacement goal in retirement

Carol (age 58)1

• Has $650,000 in total retirement savings • Would like to plan for $65,000/yr to cover essential expenses in retirement• Expects at least $10,000/yr from Social Security, leaving a retirement income shortfall of $55,000/yr to fund from savings

Designed to bring clarity, ease and flexibility to the experience of saving and investing for retirement:


Tool Example (continued)

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Sample screen shots are for illustrative purposes only. Data is as of 7/3/2014. Data shown does not represent an actual investment or account. CoRI exposure is based on the CoRI Retirement Indexes. See prior slides for more information.

3

4 5 6

1

2

Seeks to provide investors and advisors with a framework that shifts the focus of retirement planning to setting and monitoring progress toward achieving income goals:

1. Time horizon

2. Current retirement savings

3. Retirement income goal

4. Portfolio allocation

5. Additional savings/ contributions per year

6. Potential outcomes


Summary: Changing the conversation to retirement income

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We believe that these Indexes and tool are a transformative step toward shifting the focus and objective of retirement planning to lifetime income.

The idea behind it is simple and powerful:

1

2

3

Quantify retirement income in clear, actionable terms

Empower a lifetime income-based portfolio planning framework

Manage income goals over the critical pre-retirement period


Important Notes – CoRITM Tool

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Sample Portfolio Scenarios - Assumptions and Methodology: The sample portfolios are based on the asset class allocations as shown below. The asset classes were selected to broadly reflect the types of core equity and fixed income exposures that are commonly included within diversified portfolios. The “Moderate with CoRI exposure” sample portfolio replaces the “Moderate” sample portfolio’s fixed income allocation with CoRI exposure and is intended to show the potential role of including CoRI exposure in a portfolio. CoRI exposure is based on the BlackRock CoRI Retirement Indexes, which are a suite of fixed income indexes designed to track the estimated cost of future lifetime retirement income. Other asset classes not considered in the portfolio illustrations may have characteristics similar or superior to those included in the analysis.

Sample Portfolio Asset Allocations:

These portfolio illustrations are for informational purposes only and do not represent actual investments or accounts. These scenarios assume you are investing your total current retirement savings and additional annual savings in the sample portfolios shown.Additional Annual Savings: The additional required savings is derived by calculating the savings rate that will make your estimated annual retirement income equal your desired annual retirement income, within the range shown, at age 65. This calculation considers your current retirement savings, the assumed return of the sample portfolio, and the assumed return of additional annual savings over time. The assumed return of the sample portfolio is calculated using each applicable asset class’s assumed return as set forth below (see Long-term Capital Market Assumptions).Annual Retirement Income Range: The annual retirement income range is derived by growing your current retirement savings and additional annual savings over time by the assumed return of the sample portfolio in order to calculate a minimum, maximum, and average projected portfolio balance at age 65. The minimum and maximum balances reflect the assumed volatility (risk) of the applicable asset classes in the sample portfolio (see Long-term Capital Market Assumptions). The annual retirement income range is derived by dividing these three projected portfolio balances by the CoRI Retirement Index level that corresponds to your age, and applying a 68% confidence level, which reflects an assumption that your estimated annual retirement income at age 65 is expected to fall within the range shown +/-1 standard deviation. Standard deviation is a statistical measure used to estimate how dispersed calculation results are, in relation to an average or expected value.Long-term Capital Market Assumptions (as of Q2 2014):

BlackRock typically reviews the assumptions quarterly. These assumptions are provided for illustration purposes only, are subject to change as subsequent conditions vary, are not a prediction of future results and are subject to inherent limitations. “Assumed” return and risk estimates are subject to uncertainty and error. Assumed returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted, so an investor should not expect to achieve returns similar to the analysis shown herein. References to assumed returns are not promises or even estimates of actual returns a client portfolio may achieve.

Asset Class Benchmark Annualized Assumed Return Annualized Assumed RiskUS Large/Mid Cap Equities Russell 1000 Index 7.25% 15.38%US Small Cap Equities Russell 2000 Index 7.96% 19.65%International Equities MSCI ACWI ex-US Investable Market Index 7.98% 18.18%US Bonds Barclays U.S. Aggregate Bond Index 3.00% 3.74%CoRI exposure BlackRock CoRI Retirement Indexes 4.05% 9.50%

Conservative Moderate Portfolio Moderate with CoRI exposure60% U.S. Bonds 40% U.S. Bonds 40% CoRI exposure40% Equities

• 25% U.S. Large/Mid Cap Equity• 10% International Equity• 5% U.S. Small Cap Equity

60% Equities• 35% U.S. Large/Mid Cap Equity• 20% International Equity• 5% U.S. Small Cap Equity

60% Equities• 35% U.S. Large/Mid Cap Equity• 20% International Equity• 5% U.S. Small Cap Equity


Important Information

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IMPORTANT: The projections or other information generated by the CoRI tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.

This information should not be relied upon as investment advice, research, or a recommendation by BlackRock regarding (i) the use or suitability of the indexes or (ii) any security in particular. Investors should consult their financial advisor to evaluate their investment needs.

The CoRI Retirement Indexes and the CoRI tool do not guarantee future income or protect against loss of principal. There can be no assurance that an investment strategy based on the CoRI Retirement Indexes or the CoRI tool will be successful. Indexes are unmanaged and one cannot invest directly in an index.

Investing involves risk, including possible loss of principal.

The CoRI Retirement Indexes and data are subject to change. Data shown is for informational purposes only and does not represent an actual account. The CoRI tool is based on CoRI Retirement Index levels that are updated daily, so results may vary with each use and over time. The CoRI Retirement Indexes and CoRI tool do not reflect the fees, expenses and cost that may be associated with an annuity or any other retirement income product that an individual may purchase, or any assumption that such a product will be available for purchase at the time of retirement. Actual investment outcomes may vary. Although the CoRI tool provides an estimate of the amount of money you need today for every dollar of annual income you want in retirement, this estimate is not a guarantee. A number of factors may contribute to variations in retirement income.

The CoRI Retirement Indexes are maintained by BlackRock Index Services, LLC (the “Affiliated Index Provider”), a subsidiary of BlackRock, Inc., that designs, sponsors and publishes indices for use in portfolio benchmarking and portfolio management. While the Affiliated Index Provider publishes descriptions of what the CoRI Retirement Indexes are designed to achieve, the Affiliated Index Provider does not provide any warranty or accept any liability in relation to quality, accuracy or completeness of data in respect of the CoRI Retirement Indexes, and does not guarantee that the CoRI Retirement Indexes will not deviate from their stated methodologies. The Affiliated Index Provider does not provide any warranty or guarantee for Affiliated Index Provider errors..

This material is intended for Canadian permitted clients only.

© 2014 BlackRock, Inc. All rights reserved. BLACKROCK, CoRI, and the CoRI logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries. All other marks are the property of their respective owners.

Why Determining Retirement Readiness Doesn’t Have to Be … · 2018. 4. 20. · Why Determining Retirement Readiness Doesn’t Have to Be Complicated ... 63 CoRI Index 2016 ^CORI2016

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