The first five years of retirement can shape how comfortably your money supports you for decades. A market downturn, higher spending, or an early jump in inflation can change your plans just as your paycheck stops.
Simply assuming the market will recover or your expenses will drop is not enough. I want to walk you through these risks and show how guaranteed income, savings, and investments can work together to help you prepare.
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!)
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Why Are the First Five Years of Retirement So Important?
When you are working, a market drop can be an opportunity to buy investments at lower prices. You are still earning a paycheck, adding to your accounts, and potentially have years before you need that money.
Retirement changes that relationship. You are taking money out, and your portfolio may need to support you while the market is down.
Those early years also tend to bring travel, family spending, and other plans you have put off. Combine those withdrawals with losses or rising prices, and you can put pressure on the money that needs to last another 20 or 30 years.
The goal is to answer a practical question: If the market falls shortly after I retire, where will my income come from?
How Can Sequence of Returns Risk Hurt Your Retirement?
Sequence of returns risk is the danger that investment losses happen at an especially damaging time, such as when you first start taking retirement withdrawals. The order of your returns matters because you are spending from the account while its value changes.
In the video, I illustrate a retiree with $1 million who wants to withdraw $65,000 a year and increase that income with 3% inflation. I use a severe historical market scenario to show what could happen if retirement begins during a particularly difficult stretch.
In that illustration, the portfolio eventually runs out. This is a stress test, not a prediction, but it shows why an early downturn deserves attention.
Even a strong rebound may not repair the damage. A 53% gain on a depleted account does not add the same number of dollars as a 53% gain on the original $1 million.
Does Having $2 Million Eliminate the Risk?
I also illustrate a $2 million starting balance with $65,000 in initial annual withdrawals and a lower, 2% inflation assumption. Under the scenario shown, roughly $190,000 remains after 20 years.
That might get someone through a plan ending at age 85, but what if they live until 92? Extending the illustration shows why a larger portfolio does not automatically solve the problem.
I am not saying every retiree will experience these results. I am saying your plan should account for difficult markets and a retirement that lasts longer than expected.
💡 Pro Tip: Look beyond your account balance. Ask how your income plan holds up if losses arrive early and you keep making withdrawals.
Why Might You Spend More During Your “Go-Go Years”?
It is common to assume retirement expenses will fall because retirement contributions stop or the mortgage is paid off. Those savings can be real, but other spending may take their place.
The early years are often when you finally have time to do everything you have been planning:
- Take a long-awaited trip.
- Spend more time with your grandchildren.
- Help a family member buy a car.
- Contribute toward education.
- Pursue hobbies and experiences.
There can also be unexpected healthcare expenses or a doctor you want to use who is outside your insurance network. These are the kinds of costs that can disrupt a budget built only around routine bills.
I want you to enjoy retirement. The point is to plan for that enjoyment so a trip or a generous gift does not create an income problem later.
Before you retire, separate your regular living expenses from travel, family gifts, and potential one-time costs. That gives you a clearer picture of the income and accessible savings you actually need.
How Can Early Inflation Change Your Retirement Budget?
A slowdown in inflation does not necessarily mean prices return to where they started. It can simply mean prices are rising more slowly from a higher level.
Suppose you begin retirement needing $60,000 a year. If your costs rise by a cumulative 10% over the next three years, you now need $66,000 to maintain the same spending power.
Even if inflation then settles down, that higher starting point remains. Future increases build on the $66,000 budget.
This is why I want retirees to think about future raises, not just their first year of income. A plan that covers today’s expenses still needs a way to address tomorrow’s costs.
💡 Pro Tip: When reviewing an income strategy, ask two questions: What covers my needs now, and where could additional income come from later?
How Can Annuities Help Build a Retirement Income Base?
Annuities are tools for creating income. I do not look at them as a way to get rich, and I am not suggesting you have to move all your money out of the stock market.
The approach I illustrate uses different assets for different jobs. An annuity helps establish an income base, investments remain available for potential growth, and savings provide accessible cash.
An Example of Combining Guaranteed Income and Investments
In the video, I use a hypothetical couple, ages 60 and 59, who want to retire in three years. Their example includes:
- $650,000 allocated to an annuity with a lifetime income rider.
- $500,000 remaining in the stock market.
- $150,000 held in savings.
- $40,000 a year in assumed Social Security income.
- $10,000 a year from a pension.
The annuity illustration shows roughly $60,000 to $61,000 in annual joint lifetime income beginning after three years. These are the figures shown in the video, not a current quote or a payout available to everyone.
Combined with the assumed $40,000 in Social Security, that is approximately $100,000 to $101,000 a year. Including the separate $10,000 pension mentioned in the example brings the total to approximately $110,000 to $111,000.
The purpose is to establish enough income that an early market decline does not force the couple to depend on selling their remaining investments for regular expenses. Their investments still carry risk, but the income plan gives those assets more time.
👉 Want help comparing annuity options for your retirement income? Visit johnstevenson.com to use my calculators or schedule a call with me.
What Trade-Offs Should You Understand Before Buying an Annuity?
An income annuity strategy should be evaluated for the job you want it to do. In this example, that job is lifetime income, rather than maximizing the amount left to heirs.
With the income rider illustrated, the account value can eventually be depleted while qualifying lifetime payments continue under the contract. Any remaining death benefit depends on the contract and its value at the time of death.
That is why I separate money intended for income from assets intended for legacy. For my wife and me, our stocks and home serve a different purpose from the annuities we use for income.
You should also understand these points before choosing a contract:
- Inflation: The illustrated annuity payment does not automatically rise with inflation.
- Access to money: Withdrawal rules, surrender charges, and rider restrictions affect flexibility.
- Contract details: Income guarantees depend on the issuing insurer’s claims-paying ability and compliance with the contract.
- Comparison: Payouts and features vary, so compare more than one option.
In the above video, the couple plans to keep money invested and potentially purchase additional income later. That can be one way to plan for raises, but the amount available will depend on investment results and annuity terms at that future date.
An annuity with increasing income is another possibility. The trade-off may involve a lower starting payment or a larger premium to achieve the same initial income.
I encourage people to compare their options independently instead of assuming the first contract presented is the best fit.
Need help with finding the best annuity for your retirement?
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