Independent Thinking^®

Flourishing in a Low-Growth World

Optimism, an American strength in so many ways, is a dangerous weakness in planning for our financial futures. As wealth managers, we worry when we see our clients’ inherent optimism reflected in their long-term views of the markets and their spending habits, even as capital market returns stagnate. Thriving in challenging markets starts with an acknowledgement – and an adjustment to – the prevailing climate.
 
Inflation, which we project at 2% a year, remains low by historic standards. But the cost of living well, as most of our clients understandably choose to do, continues to increase, often at astonishing rates. Whether you are trying to buy Hamilton tickets, sending a child or grandchild to college, traveling at peak seasons, or purchasing private health care, you’ll find that prices for many desirable goods and services are rising at a much faster clip than the broad Consumer Price Index suggests.
 
Even if we cut down on the fun (and there isn’t much evidence of our clients doing that), we have to consider that we are, as a group, living longer and, in many cases, better, more energetic lives than earlier generations could have ever imagined. Baby Boomers are, for example, traveling more and spending more on each trip, according to a recent Visa study – and indications are that this trend will only accelerate as the next generation ages. By 2025, travelers age 65 and up will more than double their international travel to 180 million trips, accounting for one in eight international trips globally.¹
 
When we do slow down and need help to carry out our activities of daily living, it’s likely that most of us want to stay in our own residences and will require costly aides and medical treatment from physicians who don’t take Medicare. That won’t be cheap either. The latest study by the Centers for Medicare and Medicaid estimates that health care costs overall are likely to rise by an average of nearly 6% per year for the coming decade.²
 
Sustaining our existing lifestyles, let alone funding more expensive ones, will prove a challenge. Readers will recall that one year ago we reduced our expected rate of return for our balanced account to 6%, or 2.6% after inflation, taxes, and fees. That was a good call. Today, our expectations remain broadly the same, even as we look 10 years forward.
 
My advice is unchanged too: We have to set priorities in this low-return environment. If you are concerned about your spending and about your lifestyle and legacy goals, let us prepare a lifestyle analysis for you and track the likely outcome of our market assumptions and your spending over the next decade or longer. (Jen Tse explains this approach on page 20.) You may be surprised by the results.
 
Your decisions thereafter will depend on the level of your assets and your own personal and family circumstances. Many of us may choose to rein in our spending, at least until the markets improve. (I count myself among this group, as my own parents – and three of my four grandparents – lived well into their 90s, and I need to prepare for a similarly long run.) Others will bet on a shorter time frame or choose to spend more than they earn in returns, in effect annuitizing assets and leaving a smaller legacy. Your wealth advisors will help you evaluate your options and advise which works best for you.
 
Our concern is that you will be able to make an informed choice, one that is based on sensible capital market assumptions net of inflation, taxes and fees – and that your assets will last at least through your lifetime.
 
Jeff Maurer is the Chief Executive Officer of Evercore Wealth Management. He can be contacted at [email protected].

¹ https://usa.visa.com/dam/VCOM/regional/na/us/partner-with-us/documents/mapping-the-future-of-global-travel.pdf
² https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/Proj2015.pdf