As U.S. employers move away from defined benefit pension plans in favor of self-directed retirement accounts, workers have become responsible for their own investment and longevity risk in retirement – something they’ve never had to deal with before and don’t understand very well.

One thing most people don’t realize is that retirement savings are affected by the rise and fall of interest rates and that just because your assets may be going up doesn’t mean you will have more buying power in the future.

When interest rates are low, a retirement dollar doesn’t go as far, says Chip Castille, chief retirement strategist for BlackRock. When interest rates rise, it costs less for a dollar of lifetime income.

“As we transferred pension risk from government and corporate balance sheets to individual balance sheets, we needed to help people understand what is happening to the liability on their balance sheet,” he said.

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BlackRock came up with its CoRI Retirement Indexes as a way to help people understand the cost of retirement income. The set of simple bond indexes help people determine how much it will cost for one dollar of lifetime income.

The CoRI Indexes are about two years old. They are a “great way for people to quickly and easily understand their liability and how it is moving,” Castille says.

One thing he’s learned from analyzing data from the BlackRock website is that people tend to overestimate how far their money will go. People believe that if they have $1 million in savings, it will last forever, he says. The CoRI Indexes show them that currently it will cost them $23 of their savings for $1 in retirement income. That translates to less than $50,000 a year, if they have $1 million saved up.

“Somebody hears a million dollars and they think Donald Trump; they don’t think median wage earner,” Castille says.

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CoRI combines the ability to consider investment risk and longevity risk at the same time. Embedded in the CoRI calculations are actuarial assumptions about how long people will live.

“This is a powerful tool because most people underestimate how long they are going to live. Having a number that considers actuarial assumptions is really powerful,” he says.

Over the last full year, there was a dramatic drop in interest rates. As rates came down, the cost of retirement income skyrocketed, he says.

“That was not understood widely by a lot of investors and even some advisers, who didn’t understand what happens on the liability side of the balance sheet. They are only focused on the asset side,” he says. “It is the difference between the two that needs to be considered.”

At the end of 2014, balances were up 16%, but the cost of retirement income was up 30%, he says. So far this year, rates have settled down a bit and investor asset balances have increased as well, so the situation isn’t quite as bad as it was three months ago.

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Last year, the 10-year Treasury note went from 2.90 to 2.10. It dropped almost a third over that period.

“It doesn’t feel like a lot, but it is 80 basis points. That was a big move; a 30% move,” he said.

Investors will catch up when interest rates start to come back up.

“If we can get rates to come back up, it will make the cost of retirement cheaper,” Castille says. “If you can invest in bonds at higher rates of interest, the coupon is good income and is income retirees can live off of.”

He points out that investors want to find the proper level of indifference to what is happening in the rate market.

“There is a way to build a portfolio so you are indifferent to the rate market,” Castille says. “You can buy funds that track CoRI. If the rates go up and the cost of retirement goes down, your fund will go down, but it is OK because you’ve got the same level of purchasing power. On the other hand, if rates go down and the cost of retirement income goes up, the funds should go up. It feels good to have a higher asset balance, but it is not going to buy you more retirement income.”

Paula Aven Gladych is a freelance writer based in Denver.

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