That the current yield on risk-free assets is well below historical norms is no secret. This low yield, coupled with increases in client longevity, has roughly doubled the cost of funding a real dollar of income in retirement over the past 25 years, according to a recent study.

What’s more, clients hoping to soften the blow of low, safe asset returns by accepting greater portfolio risk are not likely to achieve historical returns on equities.

As a result, according to a paper entitled Planning for a More Expensive Retirement (co- written by David Blanchett, Michael Finke and Wade Pfau), that was published recently in the Journal of Financial Planning, you may need to modify expected returns given in planning software to provide your clients with more realistic projections on meeting their long-term saving and spending goals.

The combined impact of lower asset returns with long retirements will “require increased savings, reduced consumption in retirement, a delayed retirement or some combination of these to achieve a successful retirement,” the paper concludes.

Advisors who use historical asset return data or outdated mortality assumptions run the risk of providing clients with an overly optimistic estimate of either the age at which they can comfortably retire or the amount of savings needed to maintain their current lifestyle.

Saving and spending depends on how much a household earns in the future, how long clients can expect to live in retirement and the expected return on investments.

For example, assume a household earns $50,000 at age 25, anticipates a 3% annual real growth rate in income and the clients want $1 million in purchasing power after age 65.

Anticipating a 5% real return on investments, that client household needs to save only 10% of income each year.

If these clients anticipate making only 2% in the future, though, they will need to save 18% of their income each year in order to reach their $1-million goal.

The target savings rates using historical data for households who begin saving at age 25 are roughly 4.3% for low earners ($25,000) and up to 9% for high earners ($250,000), the paper estimates.

Factor in more realistic, lower returns and that target savings rate jumps sharply to 7.0% for earners of more modest means and to 16.4% for high earners.

Beginning to compile savings later only compounds the problem.

For example, a single, 40-year-old person earning $50,000 a year would need to save 19.4% in a low-return world to fund that desired lifestyle in retirement; the same person earning $100,000 would need to set aside 25.6%.

The problem in presenting unrealistic scenarios to your clients lies in their belief that they can achieve their long-term financial goals without making the significant sacrifices required by this low-return environment.

You risk misleading your clients about when they can comfortably retire – or about the lifestyle they can expect when they do.

According to the paper, using historical returns also may mask the potential benefits of strategies that provide greater value when investment returns are low, such as the ability to earn mortality credits through annuitization on investments later in life.

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