At 45, a bad year in the market stings. But you’re still working and adding money. You may even be buying investments while prices are low.
At 65, the math flips. You’re withdrawing money instead of adding it. If the market drops early in retirement, you may have to sell investments while they’re down just to cover your bills, and those dollars never get the chance to recover.
This has a name: sequence-of-returns risk. Here’s what it means and what you can do about it.
When you’re withdrawing money, early losses do more damage because you’re selling investments while prices are down.
Two retirees can earn the same average return and still end up with very different balances, simply because the bad years arrived in a different order.
- The first few years of retirement matter most.
- Covering essential bills from dependable income reduces forced selling.
- A plan made before you retire beats a plan made during a downturn.
Two retirees, the same returns, different results
Picture two retirees. Each starts with $500,000 and withdraws $30,000 at the start of every year. Over three years, both see the same three returns: one year down 20% and two years up 10%. The only difference is the order.
Without withdrawals, they would end up in exactly the same place. With withdrawals, the retiree who hit the bad year first finishes with less, because they sold more of their investments while prices were low.
Why timing matters so much once withdrawals begin
When you sell investments after a drop, you need to sell more shares to get the same dollars. Those shares are gone for good, so they can’t benefit when the market recovers.
Later in retirement, your balance has had time to grow or settle, and a downturn affects a smaller share of your remaining years. That’s why the years just before and just after you retire deserve the most protection.
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Ways retirees try to reduce sequence risk
No strategy removes market risk completely. These approaches aim to keep you from being forced to sell at the worst time.
Keep a cash cushion for essentials
Holding a year or more of essential spending in cash or lower-risk savings can let you skip selling investments during a downturn.
Cover essential bills with dependable income
Social Security, a pension, or other steady income, including annuity income for some retirees, can pay the bills without touching your investments.
Stay flexible with withdrawals
Spending a little less in down years, when possible, can help your savings recover faster.
Separate savings by purpose
A two-bucket approach gives your bills a dedicated source of income and lets your long-term money stay invested.
Get a second opinion before you retire
The months before retirement are the best time to stress-test your plan, not the months after a market drop.
Where an annuity may fit
Some retirees use an annuity to create income that doesn’t depend on selling investments in a down market. With a fixed indexed annuity, for example, a market decline by itself does not reduce the value already credited to the contract.
That protection comes with tradeoffs. Potential interest is limited by features such as caps, participation rates, or spreads, and withdrawals, surrender charges, and rider costs can reduce what you receive. An annuity is one tool for part of your savings, not a replacement for a full plan.
Common questions
What is sequence-of-returns risk?
It’s the risk that poor market returns early in retirement, while you’re withdrawing money, reduce how long your savings last, even if average returns over time look fine.
Does sequence risk matter after the first few years?
It still matters, but the early years carry the most weight, because losses then affect a bigger balance and more years of withdrawals.
Can I avoid sequence risk completely?
Not if your savings are invested. You can reduce its impact by keeping cash reserves, covering essentials with dependable income, and staying flexible with withdrawals.
Should I sell everything if the market drops after I retire?
Selling in a panic can lock in losses. A plan that already covers your essential bills makes it easier to stay calm and avoid rushed decisions.
You can’t control the market. You can control your plan.
Sequence risk is about timing, and timing is exactly what a good retirement-income plan prepares for. Give your essential bills a dependable source of income, keep a cushion, and the next downturn becomes something to wait out, not something to panic about.
Sources and editorial notes
- Investor.gov (SEC): Annuities
- Investor.gov (SEC): Updated Investor Bulletin — Indexed Annuities
- FINRA: Annuities
This article is educational and is not individualized financial, tax, or legal advice. Annuities are insurance contracts, not bank deposits, and are not FDIC-insured; any guarantees are backed by the claims-paying ability of the issuing insurance company. Features, fees, and availability vary by contract, carrier, and state.