CoRI Index: A Tool to Lock-in Annuity Prices without Annuitizing

Wade Pfau, Ph.D., CFA

by Wade Pfau, Ph.D., CFA

March 25, 2015

I recently wrote a column for Financial Advisor magazine called, “Asset Allocation And The Cost Of Retirement Income.” That column provides background information for an upcoming session with the same name at the Financial Advisor Retirement Symposium. On April 1, I will have the opportunity to explain how my Retirement Dashboard works, alongside Chip Castille of BlackRock, who will be explaining the logic behind BlackRock’s CoRI Retirement Indexes. My Retirement Dashboard and the CoRI Indexes both provide different ways to conceptualize about the costs of retirement and the amounts of sustainable income which those approaching retirement can expect.

In this post, I want to focus on the CoRI Indexes, as I’ve become more impressed with them as I’ve learned about how they work.

The CoRI Indexes are bond funds. But they are not just any old bond funds. Rather, they are bond funds whose prices are calibrated to move in lock-step with the price of an income annuity with a 2.5% COLA which will begin income at age 65. This is a very powerful tool. I explain more about how the indexes work in my column, so please see my explanations there for further information.

In order to provide some different content for this post, let me consider a bit more about the role that a CoRI Index can play in a retirement plan.

In past posts, I’ve discussed the Russell Investments philosophy about the “option value of waiting to annuitize.” The annuity option is always preserved in the background as a possibility if necessary, but the decision is held-off for as long as possible. CoRI provides a way to lock-in the price of the annuity, so that one no longer needs to worry about market risk or interest rate risk decreasing the amount of income which can subsequently be purchased. If one then decides to annuitize, the index lets them know how much income they could obtain. But if they don’t annuitize, it is still just like any other bond fund which can be sold, with those assets then used for other purposes.

Another use could be within a target date fund. Last October, the Treasury Department issued new regulations about how deferred income annuities (DIA) could be included in target date funds for qualified accounts, and inclusion of a CoRI index could lead to a similar outcome as a DIA. Compared to a life-only DIA, the CoRI index would offer more liquidity and optionality for the assets. Either the index or a DIA could be a powerful form of protection from sequence of returns risk near the retirement date, since it removes the market risks about the level of sustainable retirement income which can be supported by this portion of assets.

To be clear, CoRI is not the same as an income annuity. It does not provide mortality credits. To obtain mortality credits, i.e. to have income continue at levels calibrated to remaining life expectancy even in the event of a very long life, it is necessary to purchase the income annuity. The CoRI Index just locks in the price for that income in advance. These indexes are available for ages up to 75, and I’m not sure of the exact reason why they stop at 75, but I gather that this is the age where mortality credits start to accelerate, making it increasingly difficult for a bond fund to keep up with the subsequent income annuity pricing.

The CoRI Indexes are an intriguing concept which should be on the radar for those interested in retirement income planning.

Photo by Tom Woodward, used under Creative Commons 2.0

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