Two portfolios can earn the same five returns but end with different balances when withdrawals occur along the way.
A market drop is uncomfortable at any age.
It can be especially costly just after retirement, when you are selling investments to pay bills.
This is called sequence-of-returns risk: the order of returns matters once money is being taken out.
Consider two people who each start retirement with $500,000 and withdraw $30,000 at the end of each year.
Both portfolios experience exactly the same five annual total returns after costs:
- One year at -30%
- Four years at +8%
Only the order changes.
Taxes and inflation are excluded.
| Five-Year Return Order | Balance After First Withdrawal | Balance After Five Withdrawals |
|---|---|---|
| -30%, then four years of +8% | $320,000 | About $300,173 |
| Four years of +8%, then -30% | $510,000 | About $351,543 |
The difference is about $51,370.
Both paths have the same set of returns and the same compound return before withdrawals.
Early losses hurt more because the retiree withdraws from a smaller balance; later gains then apply to fewer dollars. A different withdrawal amount, timing, or return path would change the result.
Could a Fixed Indexed Annuity Help With This Problem?
An FIA’s index crediting rule generally prevents a negative index change from being passed through as a matching account loss during the crediting period. If an attached rider promises lifetime withdrawals, qualifying income can continue under the contract even after account value is exhausted. Those features can make a portion of essential spending less dependent on selling shares after a market decline. But the annuity is not a free substitute for stocks.
Credited gains can be capped or otherwise limited. Rider charges and withdrawals can lower account value. Accessing more than permitted under the rider may reduce future guaranteed income, and surrendering early may trigger charges. Some contracts permit rate changes at renewal.
A guarantee also relies on the insurer’s financial strength.
There Are Other Ways to Address Sequence Risk
You could:
- Keep a spending reserve
- Adjust withdrawals after down years
- Diversify
- Delay some discretionary spending
Each choice has costs and uncertainties.
The point of this example is to ask:
Which dollars must be dependable for monthly bills, and which dollars can remain invested for long-term growth?
This is invented arithmetic, not historical S&P 500 data or an annuity performance illustration. Each year’s assumed return is applied before that year’s $30,000 withdrawal. Real portfolios have variable returns, expenses, taxes, and possible spending changes.