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This is the fourth installment in our white paper series, “Is Our Industry Prepared for Retirees’ Longer Lifespans?”
In our earlier pieces, we highlighted the new science behind increasing longevity (read here), the negative impact of compounding inflation (read here), and how even modest market returns - when sequenced poorly - can ruin a retirement plan (read here).
Now, in Series 4, we introduce a central dilemma that challenges the very foundation of retirement planning: The Retirement Investment Paradox™.
At its core, this paradox highlights the growing tension between two seemingly opposing goals - growth and portfolio stability.
On one side, financial advisors must aim to get enough growth to fight inflation and fund potentially 40+ years of retirement. But on the other, they must defend against sequence risk and protect portfolios from early retirement losses that can derail a client’s long-term retirement.
This paradox is not theoretical - it plays out in every portfolio constructed for today’s retirees.
In this installment, we discuss this paradox, offer a relatable analogy to help clients understand the stakes, and examine how even positive-but-modest returns can fall short in the face of compounding inflation and extended life spans.
The Retirement Investment Paradox™
As a financial advisor, preparation for a client’s longer potential life span can make retirement planning challenging. We give this challenge a name: The Retirement Investment Paradox™. It stems from a financial advisor's conflicting choices between growth and safety in retirement asset allocation planning.
The three main risks that define the Retirement Investment Paradox™ include:
- inflation
- increased longevity (up to 40 years or longer)
- sequence risk.
A trip to Hawaii
Think of retirement planning as sailing a ship from San Diego to Hawaii.
The goal is to reach Hawaii (a comfortable retirement) with enough supplies (money) to last the journey.
- Inflation: Think of inflation as a constant headwind. It steadily pushes against the ship, making progress harder and requiring more supplies (money) than initially expected.
- Increased Longevity: What if mid-voyage, you discovered that Hawaii is farther away than you initially calculated? This means you will now be on the boat longer, and your supplies may not last for a longer journey.
- Sequence Risk: Picture unpredictable storms during your voyage. If a major storm hits (poor sequence of returns, especially in the first few years of retirement), it can damage the ship and deplete supplies, making the rest of the journey precarious. Or if you went too slow early in the trip, basking in the Pacific Ocean sun, only to find that you will not have enough supplies to last the entire journey.
And there lies the paradox.
Sailing at full speed with unfurled sails is analogous to a growth investment strategy. It exposes the sailboat to devastating storms, as sequence risk can devastate a retirement portfolio in turbulent markets.
Sailing too cautiously with reduced canvas is like a conservative investment strategy. While this approach offers protection from storms, it risks depleting supplies before reaching Hawaii, just as conservative investments may not overcome inflation or fund an extended retirement.
Like a financial advisor, the captain must balance these competing paradoxical challenges, keeping sufficient speed for an increasingly long journey while protecting the boat from catastrophic damage. Neither maximum speed nor maximum safety alone can ensure success.
Solve for inflation and living longer
As we all live longer, today’s retirees require their investments to grow to combat inflation and fund potentially longer retirements. Historically, equities have been an asset class that has provided growth for living longer and generally outpaced inflation over the long term.
Assuming the current 65-year-old may live another 40 years or more, when we look at equities from December 1984 to the end of December 2024, the S&P 500 delivered an annualized return of 11.76% during this period, including reinvested dividends.
This performance exceeded the average annual inflation rate of 2.79%, resulting in a real inflation-adjusted return of 8.97%.
For perspective, a $100,000 investment in December 1984 would have grown to approximately $8,539,958 by December 2024. In contrast, simply keeping up with inflation would have required only $300,632 to maintain the same purchasing power.
It is important to note that this period included several major market downturns, including five bear markets, the second-worst market decline in the S&P 500's history, and the “lost decade” for stocks.
The Paradox
While equities are an asset class that may effectively combat inflation and provide growth for living longer, they can also cause sequence risk, devastating even the best-planned retirement.
Solve for Sequence Risk
However, a financial advisor can plan a retiree’s portfolio with less volatile assets like annuities, bonds, and bucket strategies to defend against sequence risk.
The Paradox
While they may do an great job on sequence risk, they may not provide the growth needed for long-term inflation and longer life expectancy.
The paradoxical tension between the need for growth and safety creates The Retirement Investment Paradox™, where the assets that best provide long-term growth also pose the most significant short-term risks.
The strategies that can mitigate these short-term risks may not provide the growth to overcome inflation and thoughtfully plan for the 65-year-old who may live another 40 years or more in retirement.
For example, a retiree begins with $1 million and earns a conservative 4% annual return after all fees and expenses. The retiree withdraws $40,000 annually, increasing by 2% annually to account for inflation. Despite the steady positive returns, their account will be depleted by year 34 of retirement.
Source: Source: Dunham & Associates Investment Counsel, Inc., 2025.
For illustrative purposes only.
This shows the potential flaw in too-conservative planning. While a 4% net return after fees and expenses helps protect against sequence risk, the combined effects of inflation and extended longevity ultimately exhaust the portfolio. The modest return proves insufficient to sustain a retirement that could last four decades or longer.
Interestingly, the dual impacts of living longer and 2% inflation also have a devastating effect on a 5% net return after fees and expenses. The chart below shows that even a moderately conservative return of 5% net exhausts the portfolio after 43 years.
Source: Dunham & Associates Investment Counsel, Inc., 2025.
For illustrative purposes only.
A 5% net annual return after fees and expenses offers significantly better portfolio longevity and extends retirement funding deeper into the later years. However, this return rate may still not be enough for retirees who experience exceptional longevity. The reality of increased life expectancy requires a fundamental reconsideration of what constitutes adequate investment returns for retirement portfolios.
This evolving longevity challenge compels the financial industry to undertake a thorough reassessment. Traditional portfolio theory, conventional investment offerings, and established compliance frameworks may all require substantial revision to address the demands of funding retirements that could span four decades or longer. The financial services industry must adapt its practices and assumptions to better serve clients who may live well beyond current historical life expectancy patterns.
The Retirement Investment Paradox™: A Call for Industry-Wide Reassessment?
The Retirement Investment Paradox™ highlights a real problem - the need for growth to fund longer retirements and the need for protection against early losses.
Lean too far in either direction, and clients risk running out of money - or missing the growth they need to stay ahead of compounding inflation.
Keep in mind that the old rules were not built for 30- or 40-year retirements. Today, advisors need strategies that do more than just survive market cycles - they need to last even longer than previously assumed.
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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.
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.