Our Longevity and Purchasing Power

By Dan Crimmins on February 6, 2017 in Behavioral Factors in Investing

In ancient Roman times, there was an elder by the name of Cato who said:

Cessation of work is not accompanied by cessation of expenses

This applies today even more so than it did back then. Even if you were a member of the wealthy class during Roman times, the average life expectancy was age 60. Now due to improved living conditions and the improvements of the modern medical system, a typical married couple, nonsmoking and retiring at the average US retirement age of 62, should be planning for a 3+ decade-long retirement.

This reality requires that pre-retirees and retirees understand this truth and develop an investment strategy based on that reality. Because in this new long-term retirement, it’s not just that expenses will continue to rise before you retire, it is also true that these expenses will continue to rise with the ever-increasing cost of living after you retire. This yearly purchasing power decline takes its toll over three decades.

Using the historic long term cost-of-living increase (inflation) of approximately 3%, one dollar of expenses will require $2.44 in 30 years at that same historic cost-of-living increase. To state it another way, you would need almost $2.50 to purchase the same goods and services that you purchase in the first year for $1.00.

So holding on to that one dollar, trying to maintain your principal amount instead of attempting to maintain purchasing power as you enter retirement, could be a fatal mistake as you enter retirement.

The only asset that has not only kept pace with inflation but also had a return of investment of long term greater than inflation is stock ownership. The key to owning stocks is to be aware of the short term volatility and working with a financial coach to help you stay the course with your investment plan especially when the stock market decline.

What has driven this longevity is the tremendous success scientists have achieved battling disease of the past century. According to the World Health Organization, a host of melodies from measles, whooping cough, polio, typhoid and smallpox among others has resulted in a more than doubling of human life spans over the 20th century.

More recently, data from the National Cancer Institute shows the risk of dying from cancer decreased by 22% between 1991 and 2011. Tens of millions of people are healthy today but would have already died if not for these advances. By 2010, more than 80% of cancer stricken children were surviving at least five years of 50% in 1975. Heart disease and stroke deaths have also fallen dramatically.

These trends will only continue as more computing power is brought to the table to address these medical issues. The United States Congress has assisted this cause by expanding their expenditures significantly over the last two decades. There is still medical breakthroughs which will be necessary for the aging population especially with regards to Alzheimer’s disease. Fortunately, large pharmaceutical companies are working for breakthroughs on this front.