The worst time to lose money is right after retirement, when your savings suddenly need to replace your paycheck. A market crash at that moment can create lasting damage, especially if you keep withdrawing money while your portfolio is falling.
I’m not saying this to be pessimistic. I want to show you why a large account balance alone may not protect your retirement and how using part of your savings for guaranteed lifetime income can help.
Need help choosing the best annuity for your unique situation? Have questions about getting an annuity? If so, it’s best to speak with an annuity specialist. Watch this short video to see how I can help you do this (at no cost to you!)
Tip: See how much an annuity could pay you using my annuity calculator
Why Are Market Losses So Dangerous Right After Retirement?
When you retire, you may start taking regular withdrawals from the same investments you’re counting on for future growth. If those investments lose value early, your withdrawals leave even less money available to participate in a recovery.
This is commonly called sequence of returns risk. The order of your returns matters because losses at the beginning of retirement can do more damage when you’re also spending from the account.
A market recovery doesn’t automatically undo that damage. The recovery applies to the money you still have invested, not the larger balance you had before the losses and withdrawals.
Can a $3 Million Portfolio Still Run Out of Money?
In the illustration I walk through in the video above, we start with someone retiring at age 60 with $3 million. They want $130,000 a year, with withdrawals increasing to account for 2% annual inflation.
That may not sound unreasonable at first. The starting withdrawal is a little over 4.3% of the portfolio, and this person has spent years building those savings.
But I test that plan against a severe historical return sequence based on 1929 through 1956. In the illustration, the early years include losses of roughly 8%, 24%, and 43%.
With withdrawals continuing, the results are painful:
- After about three years, the portfolio falls to approximately $900,000.
- After the fourth year, it drops to around $691,000.
- A recovery brings it back to roughly $924,000, but the original $3 million is long gone.
- Around year 13, the illustrated portfolio runs out of money.
Someone who started retirement at 60 would now be in their early 70s without that portfolio to support them. This is a stress test, not a prediction, but it shows why I don’t want your entire income plan depending on favorable market timing.
Could cutting withdrawals in half improve the outcome? Yes, but going from $130,000 to $65,000 means accepting a very different retirement lifestyle.
How Can an Annuity Help Protect Retirement Income?
My approach would be to use a portion of the portfolio to purchase guaranteed lifetime income. I would still keep money invested because I like the opportunity for market growth.
The goal is to separate the money supporting your retirement paycheck from the money you can leave invested for the future. If the market falls, you have income coming in without having to sell from a depressed portfolio.
In one example, I look at putting $1.5 million into an annuity for a 60-year-old and a 59-year-old spouse, with income starting the following month. The other $1.5 million remains invested.
The illustration describes annual annuity income of approximately $100,000. That does not fully replace the original $130,000 goal, but it provides a substantial income foundation while leaving half the portfolio in the market.
That amount is specific to the example, not a current quote. Actual payouts depend on the contract, ages, income start date, and coverage selected, and guarantees depend on the issuing insurer’s claims-paying ability.
💡 Pro Tip: Start with the income you need, then compare how much of your savings it would take to provide it. Don’t assume that everyone should put half their portfolio into an annuity.
👉 Want help comparing lifetime income options? Visit my website to schedule a call with me.
What Happens to the Money You Leave Invested?
The remaining portfolio can still lose value. An annuity income strategy does not prevent market losses in the investments you keep outside the contract.
In the second illustration, I leave $1.5 million invested and reduce withdrawals to a nominal amount. Under the same difficult market conditions, that portfolio falls to approximately $582,000.
That would be uncomfortable to watch. But having annuity income coming in changes the situation because you are NOT dependent on selling those investments to cover your expenses.
In this historical illustration, the portfolio takes years to recover, reaching roughly $2.7 million around year 20 and $3.2 million around year 21. Those figures show what happens under that specific sequence, not what every investor should expect.
I also discuss the possibility of money doubling in approximately seven years at a 10% annualized return. That is a hypothetical growth assumption, not a schedule the market promises to follow.
The point is to give your invested money time while another part of your plan provides income.
What If You Want More Guaranteed Lifetime Income?
Some people are comfortable allocating more money to an annuity because their priority is a larger retirement paycheck. In another example, I put $2 million toward annuities and leave $1 million invested.
The illustrated income options are approximately $132,000 to $133,000 per year for life. That comes much closer to the original income goal, although a level payment does not automatically increase with inflation.
Again, this is an example, not a recommendation that everyone allocate two-thirds of their portfolio. Your income needs and the money you want to keep available should guide the conversation.
One contract I discuss is a fixed indexed annuity with an income rider. It has both a cash value and a guaranteed lifetime withdrawal benefit, subject to the contract’s terms.
Here is the distinction I want you to understand:
- Withdrawals and rider charges can reduce the cash value.
- Interest credits may help support the balance along the way.
- If the cash value eventually reaches zero, qualifying lifetime income can continue under the rider’s terms.
I’m not buying that contract to beat the stock market. I’m using part of the portfolio to buy income that functions like a personal pension.
Some retirees also purchase additional annuities over time to increase their income. That can help address changing expenses or inflation, although future payout amounts depend on the contracts available when they buy.
👉 Curious how much income your savings could provide? Use the annuity calculators at johnstevenson.com, then schedule a call to compare options.
Conclusion
You cannot choose the market conditions that arrive right after you retire. You can decide how much of your retirement income depends on selling investments during those conditions.
That is why I like comparing annuities as part of an income plan. The goal is to establish dependable income while preserving room for market growth with the rest of your savings.
Your situation may look very different from these examples. I can help you independently compare annuity options, review illustrations and brochures, and understand the tradeoffs without pressuring you into a purchase.