Annuities
Sequence of Returns Risk: What It Is and How to Avoid It
THE PROBLEM
What Is The Sequence Of Returns Risk?
You may have heard the phrase “timing is everything.” In retirement, that phrase has never been more literally true — and the Sequence of Returns Risk is exactly why.
Sequence of Returns Risk refers to the danger that the timing of negative investment returns — not just the average return over time — can permanently damage or destroy a retirement portfolio. Specifically, suffering significant losses early in retirement, while simultaneously making withdrawals to fund living expenses, can cause irreparable harm that no amount of future positive returns can fully undo.
Here is what makes this risk so insidious: two retirees can experience the exact same returns over the same period — just in a different order — and one will thrive while the other runs out of money entirely. The average annual return is identical. The ending outcome is catastrophic for one and comfortable for the other.
This is not a theoretical risk. It is a mathematical reality that played out for real retirees who began drawing on their portfolios in 2000, 2008, or 2022 — years that opened with significant losses. Those retirees were forced to sell depreciated assets to fund their income, permanently reducing the capital available to recover when the market eventually bounced back.
“It’s not just what your portfolio earns over time — it’s what it earns when you start taking money out. A bad sequence early in retirement can cost you hundreds of thousands of dollars even if your average return looks perfectly fine on paper.”
| Scenario | Total Withdrawn | Portfolio at 86 |
|---|---|---|
| Retiree A — Good Sequence | $1,154,514 | $1,899,493 |
| Retiree B — Bad Sequence | $1,028,811 | $0 — Ran out at 84 |
Both retirees began at age 65 with $1,000,000. Both averaged 7.05% annual returns. Retiree B used actual S&P 500 returns 2000–2021. Retiree A used the same returns in reverse order. Withdrawal rate: 4% + 2.5% annual inflation adjustment.
Understanding The Sequence of Returns Risk
The video to the left walks through exactly what Sequence of Returns Risk looks like in practice — using two real retirees with identical $1 million portfolios and the same average annual return. One retires comfortably and leaves money to his heirs. The other runs out of money and may be forced back to work at 85.
The difference isn't how much they earned. It isn't how well they saved. It isn't even how wisely they invested. The only difference is the order in which their returns arrived — and when they started making withdrawals.
A side-by-side comparison of two retirees with the same portfolio and same average return — and how the timing of negative years early in retirement caused one to run out of money entirely. Plus: how a Fixed Index Annuitycould have changed that outcome.
TIMING IS EVERYTHING
Same Returns. Opposite Order. Different Outcome.
The following two scenarios use identical data — the actual S&P 500 returns from 2000 to 2021 — presented in opposite order. Both retirees start at age 65 with $1,000,000 and withdraw 4% of their starting balance, increasing by 2.5% annually for inflation.
| Age | Return | Withdrawal | Ending Value |
|---|---|---|---|
| 65 | +26.89% | $40,000 | $1,228,900 |
| 66 | +16.26% | $41,000 | $1,387,719 |
| 67 | +28.88% | $42,025 | $1,746,467 |
| 68 | –6.24% | $43,076 | $1,594,412 |
| 69 | +19.42% | $44,153 | $1,859,895 |
| 70 | +9.54% | $45,256 | $1,992,072 |
| 71 | –0.73% | $46,388 | $1,931,142 |
| 72 | +11.39% | $47,547 | $2,103,552 |
| 73 | +29.60% | $48,736 | $2,677,467 |
| 74 | +13.41% | $49,955 | $2,986,561 |
| 78 | –38.49% | $55,140 | $2,385,713 |
| 84 | –23.37% | $63,946 | $2,684,814 |
| 85 | –13.04% | $65,545 | $2,269,170 |
| 86 | –10.14% | $67,183 | $1,971,893 |
| TOTAL | 7.05% avg | $1,154,514 | $1,899,493 |
| Age | Return | Withdrawal | Ending Value |
|---|---|---|---|
| 65 | –10.14% | $40,000 | $858,600 |
| 66 | –13.04% | $41,000 | $705,639 |
| 67 | –23.37% | $42,025 | $498,706 |
| 68 | +26.38% | $43,076 | $587,189 |
| 69 | +8.99% | $44,153 | $595,825 |
| 70 | +3.00% | $45,256 | $568,443 |
| 71 | +13.62% | $46,388 | $599,477 |
| 72 | +3.53% | $47,547 | $573,091 |
| 73 | –38.49% | $48,736 | $303,772 |
| 74 | +23.45% | $49,955 | $325,052 |
| 80 | –0.73% | $57,932 | $175,186 |
| 83 | –6.24% | $62,386 | $28,926 |
| 84 | +28.88% | $28,926 | $0 |
| 85 | +16.26% | $0 | $0 |
| TOTAL | 7.05% avg | $1,028,811 | $0 — Ran out at 84 |
Why did this happen?
Retiree B experienced three consecutive years of negative returns right at the start of retirement — losing 10%, 13%, and 23% in the first three years. Every withdrawal those years forced the sale of shares at severely depressed prices. When the market eventually recovered, there were far fewer shares left to benefit from the gains. The portfolio never recovered. Retiree A experienced those exact same bad years later in retirement — when the portfolio was large enough to absorb them — and ended up with nearly $1.9 million at age 86.
HOW TO AVOID IT
Three Ways a Fixed Index Annuity Protects Against Sequence of Returns Risk
Proper retirement planning doesn't ignore the possibility of a bad sequence of returns — it prepares for it. There are proven strategies that use a Fixed Index Annuity to protect against this risk, whether as a guaranteed income source or as a volatility buffer.
Why a Fixed Index Annuity Eliminates Sequence of Returns Risk
0% Floor — No Losing Years
A Fixed Index Annuity can never be credited a negative return. In a year the index falls 30%, you earn 0% — your principal is fully preserved and ready to compound next year.
Guaranteed Lifetime Income
Optional income riders (GLIB) provide a contractually guaranteed income stream you cannot outlive — regardless of market conditions, account balance, or how long you live.
Volatility Buffer
By withdrawing from the FIA in down market years, you allow your market portfolio to recover without selling depreciated assets. This is the single most effective way to protect a retirement portfolio from sequence risk.
Index-Linked Growth
The FIA doesn't just sit idle — it credits interest linked to a market index (like the S&P 500) up to a cap rate, allowing it to grow during good years while providing protection in bad ones.
The GLIB is guaranteed by an insurance carrier and is an optional rider that may be added to an FIA policy for an additional charge. Hypothetical figures used for illustration purposes only. Actual results vary by carrier and product. Past performance does not guarantee future results.
All $1M in the Market — No Protection
$200K in FIA with GLIB Income Rider
$200K in FIA as Volatility Buffer
In both protected scenarios, Retiree B withdrew $125,703 more than with no protection — and still had money left at age 86. The FIA didn't just prevent running out of money. It materially improved the total outcome by eliminating the need to sell market assets at the worst possible time. Just 20% of the portfolio in an FIA changed the entire retirement picture.
IS THIS YOU?
Who Faces the Greatest Sequence of Returns Risk?
Sequence of Returns Risk is most acute for people who are approaching or already in retirement and drawing on their portfolio for income. If any of the following describe you, this risk deserves serious attention in your retirement plan:
- ✓You are within 5–10 years of retirement or have already retired
- ✓You plan to withdraw income from your investment portfolio — not just live on Social Security or a pension
- ✓Your safe-money allocation is in bond funds or stocks that can decline in value
- ✓You do not have a guaranteed income source (pension, annuity, or GLIB rider) to fall back on in down market years
- ✓You experienced the 2022 market decline and are concerned it could happen again early in your retirement
- ✓You want to understand all your options before committing to a withdrawal strategy
You cannot predict when you will retire relative to the market cycle — but you can build a strategy that makes the timing irrelevant. That is exactly what the Fixed Index Annuity is designed to do.
Free Booklet
Download Our FREE Booklet On How to Protect Your Retirement From The Sequence of Returns Risk
