Sequence of returns risk is one of the biggest threats to retirement income, yet most retirees do not hear much about it until it is already affecting their portfolio.
You can have a solid amount saved. You can follow a “safe” withdrawal strategy. You can even average a decent return over time.
But if the bad market years show up at the wrong time, especially right before or right after you retire, your retirement income plan can get hurt fast.
That is why I want to talk about sequence of returns risk, how it works, and why guaranteed income strategies like annuities can help remove some of that pressure from your retirement plan.
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
What Is the Sequence of Returns Risk?
Sequence of returns risk is the risk that your investment returns happen in the wrong order.
In retirement, the order of your returns matters because you are no longer just investing. You are also taking money out.
That changes everything.
If the market has a few bad years while you are still saving, it may not feel good, but you may have time to recover.
But if the market has a few bad years while you are withdrawing income, you may be selling investments while your account is down.
That can permanently damage your retirement income plan.
💡 Pro Tip: Average returns can be misleading in retirement. Two people can average similar returns over time, but the person who gets the bad years early may run out of money much sooner.
Why Sequence of Returns Risk Can Be So Dangerous in Retirement
Let’s say you retire with $500,000.
You decide to follow a 4% withdrawal rule and take out $20,000 per year, with income increasing for inflation.
On paper, that may seem conservative.
But if the market drops hard in the first few years of retirement, your portfolio has to recover while you are also taking money out.
That is where the problem starts.
A bad sequence can shrink your account quickly. Even if the market later has strong recovery years, those gains are being applied to a much smaller balance.
So the market may “come back,” but your account may not fully recover.
That is the part many people miss.
👉 Want help seeing how your income plan would hold up during bad market years? Click here to schedule a call with me.
The Problem With Timing Your Retirement Around the Market
Nobody knows what the market will do right when they retire.
You might retire into a strong market.
You might retire into a recession.
You might get two good years followed by a major downturn.
That uncertainty is what makes the sequence of returns risk so stressful.
A lot of retirees feel like they have to watch the market constantly because their income depends on it. That can create anxiety, especially when your paycheck now depends on your portfolio behaving well.
And the truth is, markets do not care when you retire.
They do not care when you need income.
They do not care if a downturn happens right when you plan to start withdrawals.
That is why relying only on market-based withdrawals can be risky.
Why the 4% Rule May Not Be Enough
The 4% rule is often used as a starting point for retirement income planning.
Using the same $500,000 example, 4% gives you $20,000 per year.
For some retirees, that may not be enough income.
You may need $40,000.
You may need $80,000.
But the more income you need from your portfolio, the more dangerous sequence of returns risk becomes.
If your account drops and you still need to pull money out, your withdrawal rate may suddenly become much higher than planned.
For example, taking $40,000 from a $500,000 portfolio is 8%.
But if the account drops to $420,000, that same $40,000 becomes a much larger percentage of the remaining balance.
That can put even more pressure on the portfolio.
💡 Pro Tip: The withdrawal rate that feels safe today may feel very uncomfortable after a market drop.
How Annuities Can Help Reduce Sequence of Returns Risk
This is where annuities can be a powerful retirement income tool.
An annuity can create a contractual income guarantee.
That means instead of hoping the market cooperates, you can use a portion of your portfolio to create income that continues for life.
In the example from the script, a $500,000 annuity strategy showed guaranteed income of around $43,000 per year for life.
That is an 8.6% income rate based on the original $500,000.
Most people would not feel comfortable pulling that much from a regular investment portfolio every year.
But with the right annuity contract, that income can be guaranteed.
That does not mean the annuity is designed for maximum growth.
It means it is designed for income.
And that is the key difference.
👉 Want help comparing the best annuity options for guaranteed income? Click here to schedule a call with me.
You Do Not Have to Put Everything Into an Annuity
One of the biggest misunderstandings about annuities is that people think it has to be all or nothing.
It does not.
In many cases, the strategy is to take the portion of your money you need for guaranteed income and protect that portion.
Then the rest of your portfolio can stay invested for growth, if that fits your risk tolerance.
That way, if the market has a bad two or three years, you are not forced to sell investments just to pay your bills.
Your income is already coming from the guaranteed side of the plan.
That can give your investments more time to recover.
It can also reduce the emotional pressure of watching the market every day.
Why Guaranteed Income Can Bring Peace of Mind
Retirement is not just about math.
It is also about confidence.
If you are constantly worried about whether your account will last, that affects how you live.
You may spend less than you need to.
You may worry more than you should.
You may feel like your retirement depends on perfect market timing.
That is not a comfortable or fun way to retire.
Annuities are not the best tool for every goal, and they are not usually the best choice if your main objective is maximum growth.
But if your goal is guaranteed income, they can be extremely valuable.
You are buying certainty.
You are buying a pension-like income stream.
You are buying the ability to sleep better at night knowing that a portion of your income is not dependent on the stock market.
💡 Pro Tip: The goal is not to eliminate all risk from your retirement plan. The goal is to decide which dollars need safety, which dollars need income, and which dollars can stay exposed to growth.
How to Compare Annuity Options
If you are looking at annuities, it is important to compare more than one or two options.
Different carriers offer different payouts, features, income riders, and guarantees.
That is why I believe retirees should be able to see what is actually available across the market.
I work with over 70 carriers and thousands of annuity variations, so you can compare options and make an informed decision.
The goal is not to push you into something.
The goal is to help you understand your choices and find the best annuity contract for your retirement income needs.
👉 Schedule a call to compare the best annuity options for your retirement income plan.
Conclusion
Sequence of returns risk can quietly destroy a retirement plan.
It’s not just about what your average return is.
It’s about when those returns happen and whether you are taking income during the bad years.
If your retirement income depends entirely on the market, a downturn at the wrong time can create serious problems.
But with the right plan, you can reduce that risk.
For many retirees, that means using part of the portfolio to create guaranteed lifetime income through an annuity, while keeping the rest invested for growth.
That balance can help you protect your income, reduce stress, and retire with more confidence.
Need help with finding the best annuity for your retirement?
Click here to schedule a call with me.
On the call, I can help you:
- Determine what type of annuity is best for you
- Find the highest paying annuities for your unique situation
- Answer any other questions you may have