7 minute read
This is the seventh installment of our white paper series, “Is Our Industry Prepared for Retirees’ Longer Lifespan?” – which was recently named as a finalist for the 2025 Wealth Management Industry Awards in the “Thought Leadership” category for asset managers1.
Today, I take that analysis a step further by introducing two powerful ideas: the Longevity-Inflation Impact and the Target Sustainability Rate™.
These concepts upend traditional planning assumptions and reveal why conventional “safe” portfolios may – ironically - increase the risk of failure over time.
If you’ve read our previous posts on The Retirement Investment Paradox™ or Multi-Generation Retirement™, this piece builds directly on those insights.
The Longevity-Inflation Impact
Why is this new paradigm of longevity coupled with inflation important?
This is because we find a fundamental misunderstanding of modern retirement mathematics. While the industry has long recognized increased longevity and persistent inflation as challenges, these two forces create a more complex relationship than traditionally understood. They interact in ways that fundamentally challenge traditional retirement planning assumptions.
We identified what we call the Longevity-Inflation Impact. This mathematical relationship exposes a blind spot in current retirement planning. Our research shows that while the required returns to combat longevity and inflation show a linear progression, the consequences of inadequate returns create an exponential deterioration of retirement resources.
The implications of this discovery explain some of our earlier discussion points:
- The Retirement Investment Paradox™ showed us that conservative portfolios, traditionally considered "safe," may actually increase the risk of failure over extended retirements.
- The Sequence of Inflation Risk showed us how the timing of inflation can accelerate portfolio depletion.
However, it is the mathematical relationship between these two factors, longevity and inflation, which presents the most important concept. When portfolios fail to maintain adequate returns above inflation over extended periods, the impact on portfolio depletion becomes exponential. Our research demonstrates why:
- Portfolios that appear adequately funded under traditional metrics fail decades earlier than expected.
- Each percentage point shortfall below required returns creates accelerating portfolio depletion.
- Conservative investment approaches, while appearing prudent, may actually hasten portfolio failure.
The Longevity-Inflation Impact leads us to question whether the industry's current approach to "conservative" retirement planning might systematically undermine retirees' long-term financial security.
It requires us to reconsider what constitutes appropriate returns for retirements that may span four or five decades.
Target Sustainability Rate
Much like the mythical fountain of youth promised eternal vitality, the Target Sustainability Rate™ represents our search for portfolio sustainability in an era of extended retirements coupled with inflation.
And as much as the fountain of youth was not found hundreds of years ago, modern science may be on the verge of discovering it now. So too, are we looking to find the proverbial fountain of youth in the form of a model for returns that can help a portfolio in the times we believe we have ahead of us?
To understand this relationship, we tested multiple scenarios over 50 years. We examined hypothetical, net returns after fees and expenses of 6%, 5%, 4%, and 3%, against four inflation scenarios of 1%, 2%, 3%, and 4%. Each scenario assumed a $1 million portfolio with initial withdrawals of $40,000, increasing at the respective inflation rate.
We wanted to see if there was a relationship between longevity, inflation, and portfolio sustainability. We identified what we term the Target Sustainability Rate™ which is the minimum return rate required to sustain portfolios through extended retirements in varying inflationary environments.
The hypothetical examples shown below assume a 4% annual withdrawal rate, and reinvestment of all dividends. The hypothetical, annual rates of return are not guaranteed and do not reflect the performance of any specific investment. Actual returns will fluctuate and may be higher or lower than the assumed rate.
1% Inflation
What we found at only a 1% average inflation rate for 50 years:
- 6% net return portfolio would quadruple to over $4 million.
- 5% net return portfolio would maintain value but barely keep pace.
- 4% net return would be depleted by year 44.
- 3% net return would be depleted by year 34.
At 1% inflation, we found that a 6% net after-fee return appears to hit our Target Sustainability Rate™, meaning it gave us the return needed to maintain purchasing power while supporting withdrawals over extended periods and providing growth. This rate provides a buffer against both inflation and longevity risk.
The 5% net return did not deplete the account but did not grow the account either at 1% inflation. The lower returns create a slow but inevitable depletion of assets.
Source: Dunham & Associates Investment Counsel, Inc., 2025
For illustrative purposes only.
2% Inflation
We believe that 2% inflation represents a more likely scenario, yet the results are eye-opening in this hypothetical scenario.
- 6% net return would maintain growth, ending at $1.75M.
- Surprisingly, a 5% net return would deplete the portfolio by year 43.
- 4% net return would be depleted by year 34.
- 3% return would be depleted by year 28.
At 2% inflation, annual withdrawals increase from $40,000 to $105,552, and a net 6% return is the minimum return for maintaining purchasing power and not depleting the portfolio in 50 years. Returns below a net 6% result in significantly earlier portfolio depletion than with 1% inflation, which is not surprising in itself but points to the possible harm overly conservative portfolios may bring to the retiree living longer and living with inflation.
Source: Dunham & Associates Investment Counsel, Inc., 2025
For illustrative purposes only.
3% Inflation
At a slightly higher inflation rate of 3%, none of the portfolios can withstand the Longevity-Inflation Multiplier. The depletion timeline of this hypothetical portfolio is as follows:
- 6% return: would deplete by year 43.
- 5% return: would deplete by year 33.
- 4% return: would deplete by year 28.
- 3% return: would deplete by year 25.
Even a 6% net return cannot sustain the portfolio for 50 years as annual withdrawals more than quadruple, increasing from $40,000 to $170,249. For the other tested returns, depletion would occur much earlier than with 1% or 2% inflation, which suggests that higher returns may be needed for sustained retirement income in higher inflation environments.
Source: Dunham & Associates Investment Counsel, Inc., 2025
For illustrative purposes only.
4% Inflation
All portfolios were depleted by the 34th year, with the 3%, 4%, and 5% net return portfolios failing to make it to the 30th year.
Source: Dunham & Associates Investment Counsel, Inc., 2025
For illustrative purposes only.
Why Is This Important?
Required returns progress linearly. To maintain sustainability, each 1% increase in inflation requires approximately a 1-2% increase in portfolio returns.
However, portfolio depletion accelerates exponentially. When returns fall short of required levels, the pace of portfolio depletion accelerates dramatically. Small shortfalls in returns lead to disproportionately faster portfolio depletion. This acceleration effect becomes more pronounced as inflation increases.
The returns required for portfolio sustainability are significantly higher than commonly assumed. Even at the Federal Reserve's 2% inflation target, portfolios require net returns of 6% to be sustainable over extended retirements.
Second, the consequences of falling short of these required returns are severe. The accelerating nature of portfolio depletion means that what appears to be a slight shortfall in returns can lead to dramatically earlier portfolio failure.
The implications are profound. What the industry has labeled "prudent" retirement planning might systematically undermine retirees' financial security in the new world of living longer and with inflation. It is the exact opposite of its intended effect. This requires fundamentally reimagining retirement planning methodology and portfolio construction, challenging core assumptions that have guided the industry for three-quarters of a century.
Beyond Theory: Applying the Target Sustainability Rate™ to Real Plans
As we’ve seen throughout this series - from The Sequence of Inflation Risk to Multi-Generation Retirement™ - retirement planning is entering new territory.
The Longevity-Inflation Impact shows that even small return shortfalls can accelerate portfolio failure, while the Target Sustainability Rate™ reveals the higher thresholds needed to support longer retirements under inflationary pressure.
These findings are a wake-up call that it’s time to rethink what sustainable really means in retirement.
Because if retirements now stretch 40 or even 50 years, the old playbook just isn’t enough.
More to come in the next piece.
Click here for full white paper.
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.