Investing for 200 Years

Tonight at my son’s Cub Scout meeting they had a reptile expert come show his various reptiles that they’ve rescued. He talked about how a big problem is that people buying reptiles don’t take into consideration how long they can live. Snakes can live beyond 20 years, alligators 70 years and tortoises for 200 years. Although we’ve all heard this before, I turned to one of the other parents next to me and said it’s amazing to think a tortoise still living that was born when Thomas Jefferson was president. I then thought to myself how 200 years in the future would be the year 2212. The number almost looks bizarre it’s so far in the future.

There are two investing parallels with this. Outside of a medical breakthrough, most of us should not expect to live for another 200 years. But as I always warn clients, we are all probably going to live longer than we expect to right now just it has for the past few generations. Life expectancy is constantly going up. However, using today’s numbers, if you are an average couple then you will retire at age 62 (the average retirement age in the US). If you are 62, then on average your joint life expectancy (meaning the second to die) is 92 years old. We’ll ignore for a second that this is the average and you and your spouse have a coin toss’s chance at living past 92. This means you need to plan for a 30 year retirement and stretch your money out that long. Even though 30 years is less than a 200 year old tortoise, if we do the same thing, 30 years ago was 1982 and 30 years from now is 2042. The year 2042 seems very futuristic, but it wasn’t long ago that “the year 2000” sounded about as futuristic as we could imagine, and then it came, and then it went and now it feels like an aged year.

And herein, is the power of inflation. 1982 seems not as long as ago as 2042 seems to be from now, but at normal inflation rates, you can expect the price of everything to roughly triple. Let’s look at some examples:

The price of a stamp … in 1982 was $0.20, now it’s $0.45

The average cost for a new house … 1982 was $82,200, now it’s $272,000 (even after the sharp price drop)

The average cost for a gallon of gas … 1982 was $0.91, now it’s $3.59

The average new car price … 1982 was $7,983, now it’s $29,602

(Source: www.thepeoplehistory.com)

If we were to take the data back 30 years to 1952, compared to 1982, we’d also be look at another tripling of prices. Because of this, I think it would be normal to expect:

The price of a stamp … in 2042 to be $1.35

The average cost for a new house … in 2042 to be $816,000

The average cost for a gallon of gas … in 2042 to be $10.77

The average new car price … in 2042 to be $88,806

Sound outrageous? So would the prices we pay today be to you if you we told what they’d be back in 1982, let alone 1952. As an aside, I generally expect my 62 year old clients to live beyond 2042. Based on the past 30 years of medical technology, along with the exponential nature of human progress, I don’t think it’s naïve to think that we could add another 10 years possibly much more to our live expectancy.

And I would be amiss to not mention where the S&P 500 was around February 21 of these years:

1952 – 23.16

1982 – 111.59 (a 4.81x increase over 1952)

2012 – 1362.21 (a 12.21x increase over 1982 and a 58.82x increase over 1952)

And this is just talking about S&P prices and ignores the impact of dividends which by no means should be discounted, but makes these numbers even more powerful. Either a portfolio is designed to keep up with constantly rising costs, or it’s not.

And, just for fun since I wanted to illustrated the power of investing over time, particularly over the lifetime of a 200 year old tortoise. The oldest living tortoise just died in 2006 at the age of 255 years old (born in 1750). We’ll go back a little further to 1626 when Manhattan Island was purchased for $24.00 (or what is about $1,000 in today’s money) and now the estimated prices of the whole island is about $8 trillion. While people generally think that the Native Americans at the time got cheated, had they taken their $24.00 and invested it in something earning a 10% return it would now be work about $171 quadrillion.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.