How should we advise clients about investing and spending during retirement when their life expectancy is 150 years?

Developments in medical science suggest that humans, at least in the developed nations, may enjoy that life expectancy sometime during this century. It is thus possible that some of your youngest clients may live to see the beginnings of the 22nd century. You may not be there to help them then, but the advice you give them now may make a big difference to them a century hence.

I call such superlong-lived clients "Methuselah" clients, after the biblical personage who was reputed to have lived in excess of 900 years.

It is difficult to imagine how humans will adapt to such a long life expectancy. Much will probably depend on our physical and mental vigor. If those qualities can be augmented so that the average individual is alert and active well past the age of 100, then the term "retirement" may take on a different meaning. It is possible that individuals may move in and out of the work force several times during their lives, perhaps spending down accumulated wealth before returning to work to build it up again, then repeating this cycle again and again. Others may elect to work continually and thus accumulate vast wealth, as seen later.

How advisors will interact with such long-lived clients is also unknown. Can one expect to have a 100-year relationship with a client? Given all the succeeding generations of a client who will be alive simultaneously and in need of financial advice, perhaps future practices will be more like today's family practices, which serve primarily a small number of families with large wealth. Serving multiple generations of a family, even of modest wealth, could lead to more holistic planning, which is better for both client and advisor.

In my earlier writing on withdrawals from retirement investment portfolios (which appeared in the Journal of Financial Planning), I assumed that clients would retire at age 65, live "only" to age 95, and therefore require only 30 years of withdrawals from their investment portfolios. I determined "safe" withdrawal rates, which would allow retirees to stretch their resources, based on historical investment returns and rates of inflation, until at least age 95.

After much thought, I decided the most useful analysis I could perform for the Methuselah client would be to determine safe withdrawal rates for much longer periods of time, up to at least 75 years. This would permit the advisor to advise a client based on the length of time withdrawals were required, regardless of whether they were for permanent retirement, or some future quasi-retirement.

Models Of Security Returns

Even with this simple approach, I had to contend with an initial problem. The Ibbotson Associates data, on which I base my analysis, covers only 74 years of security returns and inflation, for the years 1926 through 1999. How should I model future investment returns (and inflation) to provide for time horizons as long as 75 years?

I decided to extend my model by using a past period of historical returns and repeat it over and over, as long as necessary. I settled on the 36-year period of 1964-1999 as being representative of my hypothetical future. Thus, for the period 2000 through 2035, I used the actual Ibbotson returns for large-cap stocks (LCS), intermediate-term government bonds (ITG), as well as the measure of inflation (CPI), for the years 1964-1999.