Cash Flows for Retirement: The CoRI™ Retirement Index (CoRI Index by BlackRock (NYSE:BLK)) provides a daily "level" that can be used to calculate -- as early as 10 years before retirement -- an estimate of how much annual income your current savings could generate beginning the year you turn 65. (BlackRock CoRI Index website)
Example: Let's say (Chart 1) you have saved $750,000 and will turn 65 in the year 2018. Simply divide $750,000 by today's CoRI 2018 Index level (for example, $16.04), and you find that your savings may fund $46,758 in annual income starting at age 65.
This calculation can also be used in reverse to determine how much money you need to have saved in order to reach a specified annual, inflation-adjusted income. For example, if you want to have a starting annual income of $53,610 at age 65, then simply multiply the desired income by the applicable CoRI index to receive the total savings (principal) amount needed ($53,610 x $16.04 = $859,904).
Key to Retirement Income: However, the key to "retirement income" is your lifetime cash flow growth rate. The purpose of the CoRI Index is to have principal available by the time you're 65.
Insurance Companies Provide Retirement Cash Flow: The value ($750,000 in principal (Chart 1)) represents what the insurance companies' median price on an immediate annuity (cash flows) is at 65. This would be cash flow during your retirement years. (U.S. Department of Labor proposes to have rules governing lifetime-income options (annuity) before expanding those offerings.)
Target Rate Funds: Instead, many advisors have stuck with target-date funds, which are aimed mainly at amassing money before retirement, not generating income during retirement. However, target-date funds have a piece missing: the income stream.
CoRI Index Annual Sector Breakdown
As part of each year's CoRI Index, BlackRock constructs an investable bond portfolio to closely track the index's retirement income target levels. These target levels are calculated from various factors such as longevity, interest rates, time to retirement and insurance company appetite. The chart below shows how each year's CoRI index portfolio will be broken down into various investable bond sectors.
What Does BlackRock Think about Security's Markets?
U.S Treasuries notes (see display) are likely to go down from 2014 to 2015, reach its peak allocation in 2016, and then continuously drop from there all the way to 10% in 2022.
US Treasury STRIPS are called "zero-coupon" securities because the only time an investor receives a payment from STRIPS is at maturity. STRIPS can be purchased and held only through financial institutions and government securities brokers and dealers.
Industrial & Utility: The Industrial and Utility will go up from 2014 to 2023 (from 20% to 26% and 2% to 5%, respectively).
Financial: Financial will decline from 11% in 2014 to 9% in 2023.
Here Today, Gone Tomorrow: However, the CoRI Indexes are rebalanced monthly so allocations will be shifting from today until 2023.
Remember, these are all marketing strategies. The CoRI Indexes are not investment products and don't deliver a guaranteed income stream. It is advised that you speak with your financial planner before making any investment adjustments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Please See GrowthIncome website (growthincome.net).