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This is the fifth installment in our white paper series, “Is Our Industry Prepared for Retirees’ Longer Lifespans?” – recently named as a finalist for the 2025 Wealth Management Industry Awards in the “Thought Leadership” category for asset managers1.
But while financial advisors are familiar with “sequence risk”, there is a parallel threat that often receives much less attention.
I am talking about the Sequence of Inflation Risk.
This concept highlights how compounding inflation over longer lifespans can erode retirement portfolios more than expected. When retirees lived 15–20 years, inflation's impact could be managed more easily. But as lifespans extend, every additional year amplifies the loss in purchasing power, stretching each dollar thinner and putting far more strain on retirement income.
And much like how poor market returns early in retirement can devastate a portfolio, front-loaded inflation can significantly erode purchasing power and hasten depletion, even when average returns and inflation appear mute.
In this installment, we highlight how identical average inflation rates can still produce dramatically different retirement outcomes - revealing that when inflation occurs may matter just as much as how much inflation occurs.
The Sequence of Inflation Risk
While financial advisors often focus on the Sequence of Investment Risk, another critical threat to retirement savings exists, which is the Sequence of Inflation Risk.
This risk can be equally devastating to retirement portfolios, particularly when inflation rates exceed expected levels and erode purchasing power systematically over time.
To understand the impact of varying inflation rates on retirement savings, consider this scenario comparing two clients over 40 years. Both clients achieve a hypothetical 6% average annual return after fees and expenses throughout their retirement years. These returns suggest that the Sequence of Returns Risk does not affect either portfolio.
The inflation experience over these 40 years averages 2.5% but is distributed in different phases. During the first decade, inflation runs at 4%. In the second decade, it decreases to 3%. The third decade sees inflation at 2%; in the final decade, it drops to 1%. This structured distribution of inflation rates allows us to analyze how varying inflation levels affect retirement savings over an extended period, even when investment returns stay consistently favorable.
Consider two different sequences of these inflation rates:
Scenario 1
Client A experienced inflation in ascending order, meaning 1% for the first ten years, 2%, 3%, and 4% for the last decade. In this hypothetical case, your client is still solvent, and their assets have nearly doubled over the 40 years.
Scenario 2
On the other hand, Client B experienced inflation in descending order, starting at 4% for the first ten years, then 3% for the next ten, followed by 2%, and finally dropping to 1% in the last decade. Despite the same average inflation rate, Client B depleted their assets by the 37th year.
Source: Dunham & Associates Investment Counsel, Inc., 2025
For illustrative purposes only.
This comparison illustrates the significant impact of the sequence of inflation rates on long-term financial outcomes, even when the two scenario average return rates stay constant.
The importance of growth, as explored in the Retirement Investment Paradox™, becomes clear when we examine scenarios with lower returns and how the Sequence of Inflation Risk becomes more pronounced as we experience lower average returns on our portfolios.
Consider a situation where both clients achieved only a hypothetical 4% net rate of return after fees and expenses. Under these circumstances, the impact of the inflation sequence becomes magnified.
With an average net 4% rate of return, Client A would exhaust their retirement savings in the 36th year, while Client B would deplete my funds by the 26th year. This highlights how the sequence of inflation rates can significantly accelerate the depletion of retirement assets when combined with lower, more conservative investment returns.
Source: Dunham & Associates Investment Counsel, Inc., 2025
For illustrative purposes only.
Early higher inflation followed by the Fed’s 2% Inflation
The Sequence of Inflation Risk shows us an important aspect of retirement planning that demands our attention. This concept demonstrates how the timing and magnitude of inflation can dramatically affect the longevity of retirement savings. Let us explore this phenomenon through a diverse set of scenarios.
Let us look at a retiree with a net 6% average rate of return on their portfolio, taking $40,000 income increasing at varying high inflation levels early in retirement, followed by a more moderate 2% inflation rate.
Our analysis examines various inflation and duration scenarios to understand their impact on retirement assets. By testing different combinations of inflation rates and periods, we show how even shorter periods of elevated inflation can significantly affect retirement savings over extended lifespans. This allows us to assess the vulnerability of retirement assets to inflationary pressures, particularly as retirees face the prospect of funding retirements that could span multiple decades.
We show that brief periods of higher inflation and increased longevity may create substantial challenges for maintaining retirement assets for the long term. This relationship between inflation, time, and asset preservation is critical in modern retirement planning.
In the first scenario, a retiree experiences 4% inflation for the first 11 years of retirement, followed by 2% inflation thereafter. This individual's retirement savings last for 40 years before depletion.
In the second scenario, the retiree starts with a 5% inflation rate for the first 7 years of retirement, again followed by 2% inflation. Despite the shorter duration of high inflation, this retiree's funds are exhausted in year 39.
The third scenario shows that with 6% inflation for just the first 5 years of retirement, followed by 2% inflation, the retiree still faces fund depletion in year 39.
These scenarios underscore two crucial insights. Even relatively brief periods of high inflation early in retirement can have long-lasting and detrimental effects on financial stability.
Second, growth in a retiree’s portfolio is needed as this assumes a hypothetical 6% net rate of return. Less return accelerates the depletion of assets in these examples.
This occurs because high inflation in the early retirement years erodes purchasing power more rapidly, forcing larger withdrawals from the retirement portfolio. These increased withdrawals, in turn, leave less capital to grow and compound over the remaining retirement years, even when inflation moderates later.
Why Recognizing the Sequence of Inflation Risk Is Now So Important
The sequence of inflation risk brings to light an important yet often overlooked truth that retirees must contend with.
And that is timing matters as much as magnitude in retirement planning.
Through multiple hypothetical illustrations, I have detailed how early, high inflation - especially when paired with modest returns- can compound financial vulnerability and dramatically shorten retirement portfolios. Even scenarios with seemingly short bursts of higher inflation followed by normalization pose long-term challenges.
These insights reinforce the importance of strategic growth - not just for prosperity, but for sustainability.
As retirees face the reality of extended lifespans, financial advisors must now balance asset allocation, inflation risk mitigation, and long-term income planning to support clients through retirements that may span 30 to 40 years.
In a world where inflation’s sequence can quietly undo years of diligent saving, recognizing and planning for this risk is no longer optional - it’s essential.
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Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
About The Wealth Management Industry Awards
Dunham & Associates Investment Counsel, Inc. was nominated as a finalist for the 2025 Wealth Management Industry Awards in the Thought Leadership subcategory for Asset Managers. The annual Wealth Management Industry Awards celebrate the companies, individuals and organizations that demonstrate outstanding achievement in support of financial advisor success. In evaluating entries, multiple factors were taken into consideration, including both quantitative measures, such as specific feature set, usage, potential, scope, scale, etc., along with qualitative measures such as innovation, creativity, new methods of deployment, etc. Compensation was not received from anyone in exchange for this nomination.
For more information on The Wealth Management Industry Awards, please visit https://informaconnect.com/wealth-management-industry-awards/
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.