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How Withdrawal Rates and Inflation Can Quietly Erode Retirement Portfolios
In Part 1 of this section, we introduced the Retirement Real Return Rule, which reframes sustainable retirement planning around the spread above inflation, rather than nominal return targets.
In this article, we take that insight one step further: What happens when we apply the rule to real-world scenarios?
Using withdrawal rates of 3%, 4%, and 5% - and inflation levels up to 3% - we examine how portfolios hold up (or fall short) over a long retirement horizon.
The Retirement Real Return Rule in Various Scenarios
Our prior discussion established the Retirement Real Return Rule, which suggests that for retirement sustainability, one must maintain a 4-5% return spread above inflation. However, this assumes a 4% annual withdrawal rate, and our curiosity led us to see if this held in different withdrawal percentages. We examined 3%, 4%, and 5%, creating what we call the Retirement Real Return Rule.
A 3% Withdrawal Rate
3% withdrawal rate and 1% inflation
This is likely the most favorable scenario with low long-term inflation and a low withdrawal rate.
Under these conditions, achieving a net 4% return (3% spread above inflation) may be sufficient for portfolio sustainability, whereas a net 3% return (2% spread above inflation) narrowly avoids complete depletion of assets. However, if returns drop to a net 2% (1% spread above inflation), the portfolio becomes exhausted in year 41.
Source: Dunham & Associates Investment Counsel, Inc., 2025 – For illustrative purposes only.
3% withdrawal rate and 2% inflation
One percentage point more in inflation forces a net 5% return to stay comfortably in retirement. A net 4% return would barely make it through the longevity period, and we would deplete the account in the 41st year with a net 3% return.
Source: Dunham & Associates Investment Counsel, Inc., 2025 – For illustrative purposes only.
3% withdrawal rate and 3% inflation
Now, we are seeking a 6% net return at 3% inflation with a 5% net return barely making it and the portfolio would deplete in the 40th year of the 4% net rate of return.
Source: Dunham & Associates Investment Counsel, Inc., 2025 – For illustrative purposes only.
This data implies that the traditional view of what constitutes a "conservative" portfolio may need to be reconsidered. Even with a modest 3% withdrawal rate, maintaining a spread of at least 3% above inflation may be necessary for long-term sustainability.
Source: Dunham & Associates Investment Counsel, Inc., 2025 – For illustrative purposes only.
A 4% Withdrawal Rate
4% withdrawal rate and 1% inflation
This incorporates the traditional 4% rule for income at favorable long-term inflation. We see that a net 6% return may be needed or a 5% spread over inflation. At a 5% net return, we may be good but would fail at a conservative net 4% return, failing in year 44.
Source: Dunham & Associates Investment Counsel, Inc., 2025 - For illustrative purposes only.
4% withdrawal rate and 2% inflation
We are back to our friend 2% inflation and the 4% withdrawal rule. We see that now a net 7% return or a 5% spread over inflation is needed for optimal results. At a 6% net return and a 4% spread, we may be good but would fail at a moderate risk of a net 5% return, depleting the account in the 44th year.
Source: Dunham & Associates Investment Counsel, Inc., 2025 - For illustrative purposes only.
4% withdrawal rate and 3% inflation
At higher 3% inflation, our returns and spread over inflation increase. We now need a 5% spread or a net 8% return for the best results. A net 7% return and a 4% spread over inflation would give us good results, but we would fail at a net 6% return, which is a 3% spread, depleting the account in year 43.
Source: Dunham & Associates Investment Counsel, Inc., 2025 - For illustrative purposes only.
The traditional 4% rule faces significant challenges in various inflation and longevity assumptions. Conservative portfolios targeting 4-5% returns may be too conservative even in low inflation and may require more growth-oriented allocation than traditionally recommended.
Source: Dunham & Associates Investment Counsel, Inc., 2025 - For illustrative purposes only.
A 5% Withdrawal Rate
5% withdrawal rate and 1% inflation
A high withdrawal rate, even at lower inflation, requires a net 7% return, representing a 6% spread over inflation. A 5% spread or a net 6% return gives us a good outcome, but we fail at a net 5% return, representing a 4% spread over inflation, depleting the account in year 37.
Source: Dunham & Associates Investment Counsel, Inc., 2025 - For illustrative purposes only.
5% withdrawal rate and 2% inflation
At 2% inflation, we now would require a net 8% return or a 6% spread over inflation. We now would need a 5% spread inflation or a 7% return for our good result, and we would deplete the account in year 37 by giving your client a net 6% rate of return, which is a 4% spread over inflation.
Source: Dunham & Associates Investment Counsel, Inc., 2025 - For illustrative purposes only.
5% withdrawal rate and 3% inflation
We need a net 9% return at higher inflation, representing a 6% spread over inflation. A net 8% or 5% spread over inflation would give us a good outcome, but at this higher income level and a higher level of inflation, a net 7% return representing a 4% spread over inflation would deplete the account in year 37.
Source: Dunham & Associates Investment Counsel, Inc., 2025 - For illustrative purposes only.
This higher income requires the highest returns of all withdrawal rates. We need a consistent 6% spread above inflation for great results. Each 1% increase in inflation requires a 1% additional return. This may require more aggressive portfolio management and perhaps taking on more market risk.
Source: Dunham & Associates Investment Counsel, Inc., 2025 – For illustrative purposes only.
Our research implies that living to age 120 is not the greatest risk facing future retirees. It is surviving financially to age 120. What the industry labels as "prudent" and "conservative" retirement planning may systematically undermine retirees' financial security, creating a generational crisis where millions outlive their assets.
The mathematics of extended longevity demand we consider abandoning traditional notions of conservative retirement planning. The greatest risk to retirees is not market volatility, it is the invisible threat of insufficient returns compounded across decades.
Closing Thought: Is "Conservative" Still Prudent?
For advisors, this data challenges a long-held belief that dialing down risk in retirement is always the safest approach.
But in the face of 40-year retirements and rising life expectancies, insufficient return is the new hidden risk. Therefore, helping clients build sustainable, inflation-adjusted strategies may require rethinking old assumptions - and educating retirees about the real math behind longevity.
This concludes our white paper series, Is Our Industry Prepared for Retirees’ Longer Lifespan?
- If you haven’t yet, download the full white paper here.
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, or as a substitute for legal or tax counsel. Any examples are hypothetical and are for illustrative purposes only.
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.
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.