Retirement’s gonna cost more, and advisors need to prepare their clients—not justby warning them, but by changing the way they plan for clientportfolios.

That’s the assertion in “Planning for a More ExpensiveRetirement,” a study in the Journal of Financial Planning, whichwarns readers that recent studies are suggesting that the demandfor stocks since 1980 has pushed down returns “below theirhistorical average,” and that bonds are also providing yields thatare considerably below historical averages.

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When coupled with the rise in longevity, the study says, the resultis a doubling of “the cost of funding a real dollar of income inretirement since 1980 for a 65-year-old retiree.”

Since most planning is based on historical averages, if thosehistorical averages fail to materialize in the future, projectionsfor a portfolio’s performance are likely to beconsiderably off. Clients are likely to be left high and dry ifassets don’t provide returns as projected—something advisors needto be aware of.

The study’s authors write that “[r]esults from a life cycleplanning model showed that savings rates would need to rise sharplyfor households hoping to maintain the same standard of living inretirement if real asset returns are low”; a continued low-returnenvironment will negatively impact client spending “throughouttheir life cycle.”

And that puts the onus on advisors “to modify expected returnsin planning software to provide clients with more realisticprojections on meeting long-term spending goals.”

The study, which “provides the numbers needed to re-adjust theretirement expectations,” drives home the point that it’s not justthe clients’ expectations that need to be adjusted but also theadvisors’. In evaluating “how lower expected returns affect optimalsaving and spending during working years, retirement replacementrates, retirement lifestyles, and the cost of bequests,” the studychallenges many of the accepted tenets of retirement planning.

While an earlier study estimated that “the 10-year return on abond portfolio can be predicted with 92 percent accuracy based onbeginning-of-period interest rates,” the study says the same is farfrom true for stocks.

The return over a 10-year horizon for a stock portfolio “can bepredicted with only 27 percent accuracy by usingbeginning-of-period valuations (10-year Shiller price/earningsratio).” And that can lead advisors to “assume historicalreturns.”

Then there’s the consideration of the kind of return to beexpected “from risky assets in the 21^st century.”

While the total market capitalization of U.S. stocks increasedfrom 50 percent of gross domestic product in 1980 to 141 percent in2007, the study says, by October of 2016, the ratio was 120percent—so, even though stock prices came close to tripling,corporate profitability lagged far behind.

Therefore, the study reports, in 2007 investors had to shell out266 percent more for each dollar of corporate earnings than theydid in 1980.

Investors might reap these profits through dividends, althoughthe study points out that the dividend yield is less than half itshistorical average of 4.4 percent, or they can be reinvested toprovide growth.

Because expected stock returns are a function of the risk-freerate plus the risk premium, according to the capital asset pricingmodel, the study says, and because nominal returns on equities inthe future are expected to be “lower than the arithmetic historicalaverage,…. [t]he only returns an investor can hope to receive fromequity ownership are either future dividend payments or growth infuture earnings.”

Because of that, the authors write, “it is sensible to see theequity premium as a function of stock price and a firm’s ability topay money back to investors.”

Since stock prices are rising faster than growth in dividends orearnings—unlike the way stocks behaved between 1875–1950, whenstock prices “tended to rise in accordance with growth in dividends(or earnings),” investors—and advisors—have grown accustomed to theway stocks have behaved recently, with prices rising more rapidlythan firm earnings. (During the period 1951–2000, the study adds,stock price growth was 5.89 times greater than dividendgrowth.)

And because both clients and their advisors are used to thisrecent “excess capital gain,” the authors write that stock priceincreases without corresponding increases in earnings “may havecreated an expectation of future returns that is inconsistent withthe actual returns that stocks can provide at their 2016valuations. Stocks either need to fall significantly in value (bymore than half) in order to maintain the historical equity premium,or investors will need to get used to a lower return on equityinvestments.”

Clients are also looking at advisors’ fees and perhaps thinkingthey’re getting less for the money, and 1990 figures indicate thatFederal Reserve data on average yield show a client working with anadviser charging a 1 percent fee on assets under management wouldhave paid 12.2 cents for each dollar of income on 10-year Treasurybonds.

But at a 2.36 percent yield, the study says, a client pays anadviser 42.4 cents for each dollar of bond income. Also, in 1980, aclient paid 8.85 cents in adviser fees for each dollar of corporateearnings from stock ownership, but in late 2016 each of thosedollars in earnings cost the client 27 cents.

Then there’s the issue of client longevity. In 2016 it becameclear that the combination of lower asset returns and longretirements made the year the most costly “since calculations beganin 1980,” and future planning “would require increased savings,reduced consumption in retirement, a delayed retirement, or somecombination of these to achieve a successful retirement.”

This is particularly important since the implications of alow-return environment coupled with inflation and investmentexpenses could result in a future 0–2 percent real portfolioreturn. And that low-return environment will also substantiallyreduce the amount that savings will provide in income duringretirement.

Not only will this affect how much households have to live onduring retirement—possibly compelling a reduced spending level,depending on the level of assets the client has and whether thelevel of spending falls upon retirement—it will also affect anyplans clients may have to leave a legacy.

The authors write, “Households will need to accumulate morewealth to maintain even their lower level of lifetime spending inretirement, assuming the low-return environment persists. However,they will need to have a higher savings goal amount in order tosustain that lower level of retirement spending—particularly ifthey hope to leave a legacy.”

Reiterating the need for advisors to plan for a more expensiveretirement, the authors warn, “The price of a dollar of safe incomefor a client retiring in 2016 is nearly 50 percent higher than itwas for a client retiring in the year 2000 because of increases inlongevity and declines in real bond interest rates.”