Sequence-of-returns risk is the risk that a significant market decline occurs early in retirement, just as withdrawals begin. Because you're spending from a smaller base, later recovery may not fully restore the income-producing value. The risk isn't that markets fall — it's the timing of the fall relative to your withdrawals.
Why Timing Changes the Outcome
During your working years, the order of your yearly returns doesn't dramatically change your final balance, because you're continually adding money. Two investors with the same average return and the same contributions generally end in a similar place regardless of the order of good and bad years.
In retirement, the order matters. Consider two identical 20-year return sequences in reverse order. Same average return, same final market path — but for someone withdrawing income each year, the sequence that puts the bad years first can deplete the portfolio far more quickly, because withdrawals during a decline force selling more shares at lower prices.
What This Does and Doesn't Mean
This does not mean markets are dangerous, that you should avoid investing, or that you should move everything to cash. It means the portion of your money you'll spend soon is more exposed to timing risk than the portion you can leave invested for years.
A common response is to think in jobs: keep near-term spending liquid, keep a growth portion invested for the long run, and consider whether a protected portion — one not directly exposed to market losses — makes sense for money you'll rely on for income.
Where an Annuity May Fit
A fixed indexed annuity can't eliminate retirement risk, and we don't claim it does. But for a portion of savings, protection from direct market losses and the possibility of a lifetime-income feature may address the timing concern for that specific portion. Whether it deserves a role depends on your circumstances and the contract terms.
Questions to Ask Before Deciding
- How much of my income must come from withdrawals, and over what horizon?
- How much volatility can the portion I'll spend soon tolerate?
- Would a protected portion reduce the timing risk I'm worried about?