Retirement & Annuities
By Steven Lapa | Licensed Insurance Broker · October 7, 2026
Sequence-of-returns risk is the danger that market losses early in retirement have an outsized impact on a portfolio that is also being withdrawn from. Learn why timing matters and possible strategies.
Sequence-of-returns risk is the risk that the order in which investment gains and losses occur matters when you are withdrawing money from a portfolio. Two retirees can earn the same average annual return over 20 years and end up with very different outcomes, because losses that occur while you are actively withdrawing can permanently reduce a portfolio’s ability to recover. The risk is greatest in the years just before and just after retirement begins, when withdrawals start and the portfolio has less time to recover from a downturn. No single product eliminates all retirement risk, but several strategies can help manage it.
During your saving years, the order of your returns does not change your final balance, assuming you add no money and withdraw none. A 20% drop in year 5 and a 20% gain in year 15 produce the same ending value as the reverse, if you never touch the account.
Once you start withdrawing, that changes. Selling shares to fund spending after a market drop locks in losses on more shares, leaving fewer shares to participate in the eventual recovery. The same average return, experienced in a different order, can produce a very different outcome.
| Phase | Does return sequence matter? | Why |
|---|---|---|
| Accumulation (still saving) | Generally no | No withdrawals; the portfolio has time to recover |
| Withdrawal (retirement) | Yes | Withdrawals after losses sell more shares, reducing future growth |
Consider two retirees, each starting with $1,000,000 and withdrawing $50,000 a year. Over a 20-year period, both earn the same set of annual returns, but in reverse order. Retiree A experiences a large loss in the first few years; Retiree B experiences those same losses near the end.
Because Retiree A withdraws from a shrinking portfolio early on, the portfolio may be depleted years earlier than Retiree B’s, even though the average annual return is identical. This is a simplified illustration for education only; it does not predict any actual portfolio’s results and ignores taxes, fees, and inflation.
The first decade of retirement is sometimes called the fragile decade. A severe downturn early in retirement, combined with withdrawals, can shrink the portfolio so much that later gains cannot fully restore it. The same downturn late in retirement, when the portfolio is smaller and withdrawals are fewer, has less time to do permanent damage.
Holding a cash reserve or short-term, lower-volatility holdings can let you fund near-term withdrawals without selling growth-oriented investments after a drop. This is not free: cash typically earns less and loses purchasing power to inflation over time.
Diversifying across asset classes can reduce, but not eliminate, the chance that any single downturn hits your whole portfolio at once. Diversification does not guarantee a profit or protect against loss.
Reducing withdrawals after a market drop, even temporarily, can help preserve the portfolio for recovery. Some retirees build a spending rule that scales withdrawals with portfolio value.
Covering essential expenses with guaranteed income, such as Social Security, pensions, or an annuity, can reduce the amount you must withdraw from investments after a downturn. Annuities are one possible tool for creating income you cannot outlive, but they carry their own terms, costs, and surrender periods. For how one annuity type works, see What Is a Fixed Indexed Annuity and How Does It Work?
Each strategy trades one risk for another. Cash reduces sequence risk but increases inflation risk. Annuities reduce longevity and sequence risk on the income they cover but introduce surrender, liquidity, and carrier-credit risk. A balanced plan usually combines several approaches rather than relying on one.
If you are moving money from a former employer plan, the structure you choose affects how much sequence risk you carry. For your options when leaving a job, see What Happens to Your 401(k) When You Leave Your Job?, and for annuity-rollover mechanics, see Can You Roll a 401(k) Into an Annuity?
No. Market risk is the chance that investments lose value. Sequence risk is specifically about the order of returns when withdrawals are happening.
They can reduce it for the portion of income an annuity covers, but they do not eliminate all retirement risk and introduce their own costs and terms. See our Fixed Indexed Annuities service page for more.
There is no universal number. A common starting point is one to three years of expected withdrawals, but the right amount depends on your spending, other income, and risk tolerance.
Sources: Investor.gov (SEC): Retirement; Investor.gov (SEC): Sequence-of-Returns Risk (Glossary); FINRA: Annuities.
Educational information only, not individualized investment, tax, or legal advice. Annuity guarantees depend on the issuing carrier’s claims-paying ability. Diversification does not guarantee a profit or protect against loss. Consult qualified professionals before making retirement decisions.