6 minute read
Key Takeaways:
- Even positive returns can be risky — if they come at the wrong time. Sequence of returns risk isn’t just about avoiding losses early in retirement, but also about when returns are earned over time.
- The same average return can lead to drastically different outcomes. The Tortoise and the Hare both averaged 5% annually, yet one ran out of money while the other ended with nearly $2 million.
- Being too conservative early in retirement can backfire. In a 40+ year retirement, prioritizing safety too soon may jeopardize long-term financial security.
- Modern retirement planning must rethink traditional assumptions. Extended lifespans and compounding inflation demand a smarter balance between growth and protection.
In our first installment of our white paper series - “Is Our Industry Prepared for Retirees’ Longer Lifespans?” - we explored the extraordinary advancements in aging science and longevity — from Loyal’s longevity drugs for dogs to AI-powered breakthroughs that may one day allow humans to live to 120 or even 150. But while these innovations promise a longer lifespan, they also demand a longer financial plan.
Then, in Series 2, we examined the silent but relentless impact of inflation compounded over time. Even a modest 2% rate, when stretched across 40 or 50 years of retirement, can quietly devour a retiree’s purchasing power — turning daily necessities into unaffordable luxuries. For example, a daily latte - once routine - becomes a rare treat. Food costs alone could eat up over $2.7 million for a couple living through a half-century retirement.
Now, in Series 3, we turn to a more nuanced risk — the sequence of returns.
Traditionally, the financial services industry has focused on avoiding early negative market returns in retirement. But what if the greater threat in a world of extended lifespans and persistent inflation isn’t negative returns — but conservative ones? What if playing it too safe, too early, actually increases the risk of running out of money? In this scenario, it flips conventional retirement planning on its head.
Thus, through the lens of a reimagined fable — the Tortoise and the Hare — I discuss how even positive but modest early returns can jeopardize a portfolio over a 40+ year retirement. This installment challenges long-held assumptions and urges advisors to reconsider the true nature of risk in retirement planning today.
The Sequence of Risk Reexamined
The traditional understanding of the sequence of returns risk in retirement requires a fundamental re-examination. The financial services industry has historically focused on protecting retirees from negative returns in the early years of retirement.
However, while important, this perspective presents an incomplete picture of modern retirees' challenges.
Extended longevity and persistent inflation have created a new paradigm that demands a broader risk assessment. Our analysis reveals that even positive but overly conservative returns early in retirement can also prove detrimental to long-term financial security as negative returns.
This insight challenges the conventional approach to retirement planning. When accounting for extended retirement periods, the impact of modest early returns, though positive, may need to generate more growth to sustain purchasing power throughout a lengthy retirement period.
This new understanding of sequence risk compels financial professionals to balance protection against market downturns with the critical need for portfolio growth that can support a retirement potentially spanning up to four decades or longer.
The Fable of the Tortoise and the Hare
As both the tortoise and the hare approached retirement, the tortoise was fuming.
For his entire life, the hare had beaten him in every competition they ever had, showcasing her superior speed. Now, in retirement, the tortoise was going to seek revenge.
Knowing the hare's propensity for quick starts, the tortoise knew a growth objective for the hare’s retirement assets could lead her to sequence risk and, as a result, decimate her retirement plan.
The tortoise decided to use his slowness to what he thought would be to his advantage. He was not going to take risks early in retirement.
Starting with $1 million each, the hare and the tortoise would each have hypothetical 12-year returns of 8%, then 12-years at 6%, then 4%, and 2% for the final 12 years.
The tortoise, wanting to limit risk, received 2% for the first 12 years of his retirement, 4% for the next 12 years, 6% for 12 years, and 8% for the final 12 years.
The hare, always wanting to start fast, received 8% for the first 12 years of her retirement, 6% for the next 12 years, 4% for 12 years, and 2% for the final 12 years.
Both the tortoise and the hare would receive an identical annual hypothetical return of 5%.
Source: Source: Dunham & Associates Investment Counsel, Inc., 2025. For illustrative purposes only.
In this example, let us examine the key characteristics of both the Tortoise and Hare investment strategies to understand the sequence of return risk when you have low returns to start retirement and live for a long time.
Throughout the entire 48-year period, both the Tortoise and the Hare strategies consistently yielded positive returns. Neither strategy experienced any years of negative growth in this hypothetical example.
The Tortoise strategy saw steadily increasing positive returns, from 2% up to 8%, while the Hare strategy had decreasing but always positive returns, from 8% down to 2%. This consistent positive performance, though varying in magnitude, means that both strategies provided continuous growth without any years of loss during this hypothetical retirement period.
This underscores a crucial point of our new understanding of the sequence of risk.
Source: Dunham & Associates Investment Counsel, Inc., 2025. For illustrative purposes only.
Both the tortoise and the hare started with the same $1 million retirement account and withdrew $40,000 annually, adjusted for 2% inflation.
With lower initial returns, the Tortoise strategy depletes its funds by the 27th year of retirement despite increasing returns in later years.
The Hare strategy, helped by higher early returns, had over $1.9 million in its retirement account after 48 years, even with the same returns, just a different sequence of returns.
The concept of sequence risk in retirement planning is evolving due to increasing lifespans. Traditionally, the focus was on mitigating the impact of negative returns early in retirement. However, being too conservative can become a sequence risk as retirements stretch longer.
The industry must balance protecting against early market downturns and positioning portfolios for sufficient long-term growth. Overly conservative strategies, while hedging against short-term volatility, may not generate the returns needed to sustain an extended retirement.
Up Next: The Retirement Investment Paradox
Across this series, we've highlighted four silent but compounding threats facing modern retirees: longer lifespans and health spans, the rise of multi-generational retirement, compounding inflation, and sequence risk.
Each challenges a core pillar of traditional retirement planning. But together, they reveal something deeper — a paradox at the heart of retirement investing today.
In our next installment, The Retirement Investment Paradox, we’ll connect these forces to explain why time-tested strategies may no longer serve the modern retiree — and what financial professionals can do to help guide clients through this new retirement reality.
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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.