6 minute readDunham’s New White Paper Reveals Critical Forward Thinking in Retirement Planning
As a financial advisor, you anticipate future challenges - but one emerging risk could reshape everything you know about retirement planning.
Today, you may recommend a "conservative" portfolio for your 65-year-old client, a strategy considered prudent by every measure of traditional retirement planning. But, thanks to scientific advancements, what if that client lives to 125? Have you calculated how your strategy holds up over a 50-year retirement?
Our latest white paper, “Is Our Industry Prepared for Retirees' Longer Lifespans?” examines what could be a critical flaw in traditional retirement planning - one that could leave millions of retirees financially exposed.
It discusses how current planning assumptions systematically underestimate the returns needed for what could be extended retirements coupled with the Federal Reserve's optimal inflation number of 2% annually.
This white paper explores seven key insights that challenge conventional wisdom and may demand a new approach to portfolio construction and retirement planning. These insights expose fundamental risks and provide actionable strategies to help advisors with the realities of longer lifespans, rising costs, and heightened return expectations.
This paper asks a fundamental question: Is our industry truly prepared for longevity and inflation in our planning and compliance frameworks?
The Compounding Effect of Longevity Plus Inflation
Our research shows what could be a mathematical blind spot. At just 2% inflation, a traditionally “conservative” portfolio generating 4-5% net returns could deplete 10 to 20 years before the end of a 50-year retirement - potentially leaving your clients without resources for their final decades.
Scientists and industry are betting billions that someone alive today will live to 150, which could make 50+ year retirements inevitable. Our research shows a potentially critical flaw in traditional planning that advisors should not ignore.
The combination of living longer and inflation creates an exponential drain on retirement resources that could devastate “conservative" portfolios.
The critical question the industry must ask itself is whether traditional retirement planning models will hold up. Or will millions of retirees outlive their savings, potentially facing decades of financial uncertainty?
The Math of Longevity Plus Inflation
Longer lifespans and rising inflation could re-write everything we knew about traditional retirement planning, forcing a rethink of key financial assumptions.
For instance:
The Longevity-Inflation Impact
- Clients withdrawing 4% annually may need returns nearly double what traditional "conservative" allocations provide.
- Current planning models often underestimate how small return shortfalls can lead to exponential portfolio depletion.
- Each 1-2% rise in inflation may require a corresponding increase in portfolio returns - challenging conventional asset allocation strategies.
Our research suggests that a portfolio with 5% net returns, offset by just 2% inflation, could run out 10-20 years too soon in a 50-year retirement.
Eating Your Assets
The Retirement Investment Paradox™
Financial advisors face a difficult challenge: balancing growth and risk in retirement portfolios. Equities are essential for combating inflation and longevity risk, yet they also introduce sequence risk, which can derail retirement plans if market downturns occur early.
Conversely, conservative strategies - such as overweighting fixed income or holding excess cash - may protect against short-term volatility but often fail to generate the necessary long-term returns.
The tradeoff is clear: prioritize growth and risk running out of money too soon, or play it too safe and risk depleting assets later in life.
Advisors must rethink traditional portfolio construction to ensure sustainable income for longer retirements.
Sequence of Inflation Risk
To illustrate the impact, consider the following:
- Your clients experiencing just 5 years of 6% inflation followed by normal 2% inflation could deplete their portfolio in year 39.
- Even with a net 6% return, early inflation could decimate traditionally structured conservative portfolios.
Multi-Generation Retirement™
Traditional retirement planning was not built for a world where people live past 120.
Imagine this:
- A 30-year-old couple has a son.
- By the time the son retires at 70, his 100-year-old parents are out of money, leaving him to support two generations.
- Now, at age 30, the son has a daughter. When she retires, she faces an even greater burden - her 100-year-old parents and 130-year-old grandparents are broke, forcing her to support three generations.
- Unlike previous eras, neither the son nor daughter receives an inheritance, eroding the financial security that once helped new generations build wealth.
For financial advisors, this changes everything. If we continue to wait before we recognize the longevity coupled with inflation risk and continue to recommend too conservative portfolios, we may see one generation supporting multiple generations.
The question is no longer just, “Will my clients outlive their money?” but rather, “How many generations will be financially dependent on the next if we fail to rethink retirement planning?”
The Target Sustainability Rate: Why Returns Must Outpace Inflation
Our research tested multiple return scenarios against varying inflation rates over 50 years. The findings should change your conversations with clients.
Consider the impact of inflation on portfolio longevity:
- At 1% inflation, even a 5% net return barely maintains portfolio value.
- At 2% inflation, portfolios need 6% net returns to sustain purchasing power.
- At 3% inflation, even portfolios with 6% net returns depleted by year 43.
- At 4% inflation, the 6% return portfolio depleted before year 34.
Our findings highlight a major risk - conservative portfolios that don't outpace inflation could leave retirees without funds much sooner than expected.
The Retirement Real Return Rule: The 4-5% Gap That Changes Everything
Through our research, we discovered a fundamental mathematical relationship that challenges traditional retirement planning assumptions:
For a retirement portfolio to sustain a 50+ year lifespan, returns must exceed inflation by approximately 4-5%.
This implies:
- A 1% inflation environment requires ~5-6% returns.
- A 2% inflation environment requires ~6-7% returns.
- A 3% inflation environment requires ~7-8% returns.
- A 4% inflation environment requires ~8-9% returns.
Without this return buffer, portfolios risk depletion long before a retiree’s expected lifespan.
Advisors must reassess assumptions about traditional withdrawal rates, portfolio construction, and long-term asset growth strategies.
Rethinking Retirement Planning?
With people living longer and inflation eroding purchasing power, traditional retirement models may fail millions of retirees. Without a fundamental change in planning, we could be facing a retirement crisis in which longevity and inflation risk outpacing asset growth, potentially leaving multiple generations of retirees destitute.
Our white paper uncovers seven critical insights that challenge conventional retirement planning and introduce alternative strategies to sustain long-term wealth.
Get the full insights - Download the 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 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.
All examples are hypothetical and are for illustrative purposes only.
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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.