Expert Guide · Retirement Risks
Most retirees lose sleep over bad markets. The real danger isn't a crash — it's when the crash happens. A bear market in your first few years of retirement can permanently damage a portfolio that would have recovered just fine if you'd retired five years later.
Al Abaroa
Founder, Annuity Authority · NAFA Committee Member · 25+ Yrs Financial Services
Updated
February 2026
Read time
15 min
6×
More likely to deplete your portfolio
If it drops 15% in year one — Morningstar Research
70%
Of portfolio failures traced to years 1–5
Retirement research consensus
−32%
Stocks AND bonds fell together in 2022
The year diversification failed — S&P 500 + Bloomberg Agg
Sequence of returns risk is the danger that the timing of withdrawals from a retirement account will negatively impact the overall rate of return available to the investor. A poor sequence — specifically, large losses early in retirement — can permanently deplete a portfolio even if the long-term average return is identical to a favorable sequence.
In plain language: two retirees can have the exact same portfolio, the exact same average market return over 30 years, and end up with wildly different outcomes — purely based on whether the bad years happened early or late in their retirement.
This is one of the most important concepts in retirement income planning, and one of the least discussed in mainstream financial advice.
During your working years, market downturns are an inconvenience. You're adding money to your portfolio, not withdrawing from it. A 40% drop in year three of your career just means you're buying shares cheaply for the next 25 years.
Retirement flips this entirely. Now you're withdrawing every month to pay for groceries, healthcare, and housing. When the market drops 30%, you're forced to sell shares at a loss just to cover your expenses. Those sold shares are gone — they can't participate in the recovery. Your portfolio shrinks faster than the market fell, and slower than the market recovers.
When you sell depreciated shares to fund withdrawals, you permanently remove those shares from your portfolio. They can't recover in value because they no longer exist in your account. This is what makes a bear market in early retirement fundamentally different — and far more damaging — than the same bear market in late retirement.
Research from Morningstar shows that a 15% portfolio decline in year one of retirement — combined with a 3.3% annual withdrawal rate — makes you 6 times more likely to deplete your portfolio than if you experienced the same average returns in a favorable sequence.
The research consensus is stark: roughly 70% of retirement portfolio failures can be traced directly to what happened in the first five years — not the last five, not the middle. The opening chapter of retirement is the one that writes the ending.
This is why two neighbors who retire on the same day, with identical portfolios and identical lifetime average returns, can end up with completely different financial outcomes by age 80.
0.81
Correlation between first-5-year returns and 30-year portfolio survival
Starting balance: $500,000 · Annual withdrawal: $30,000 · Long-term avg. return: ~6%/yr
Retiree A — Markets Rise First
After 20 Years
$394,000 remaining
Income sustained. Portfolio intact.
Retiree B — Markets Drop First
Markets recovered in years 10–15 — but forced selling during the early losses had reduced the portfolio too far to benefit.
Account Depleted: Year 16
$0 remaining
Markets recovered. Too late to help.
Sequence of returns risk isn't a theory. It's played out in real markets three times in the last 25 years — each with a different character and a different lesson.
2000–02
−49%
S&P 500
Someone who retired January 2000 with $1,000,000 and withdrew $50,000/year watched their portfolio fall to roughly $550,000 by end of 2002 — before the market had recovered a dollar. By the time the S&P returned to its 2000 peak in 2007, they had been withdrawing for seven years. Many never recovered.
2008
−38%
S&P 500
A retiree who started drawing down in January 2008 faced a 38% drop by year-end. Someone who retired in January 2009 — with an identical portfolio — caught the bottom and rode one of the greatest bull markets in history. Same person, same money, different retirement date: radically different outcomes. The 2009 retiree was still financially healthy in 2020. Many 2008 retirees had already significantly altered their lifestyle.
2022
−19%
−13%
Stocks / Bonds
2022 was different from every prior crisis in one crucial way: the conventional hedge failed. Bonds are supposed to rise when stocks fall. In 2022, the S&P 500 dropped ~19% and the Bloomberg Aggregate Bond Index dropped ~13% — simultaneously. Retirees holding a "safe" 60/40 portfolio had nowhere to hide. Both buckets were down at the same time.
Most financial advisors recommend one of four strategies for managing sequence risk. Each has real merit. Each also has a ceiling — and 2022 exposed where some of those ceilings are.
Strategy 01
Keep 1–3 years of expenses in cash so you never need to sell equities during a short downturn. Simple to understand and easy to implement.
The Ceiling
A prolonged bear (2000–02 lasted 3 years) drains the buffer completely. It softens the blow — it doesn't eliminate the risk.
Strategy 02
Hold bonds as a stabilizing counterweight to equities. When stocks fall, bonds historically rise — providing income and a source of rebalancing capital.
The Ceiling
2022 proved this assumption can break. In rising-rate environments, bonds and stocks fall simultaneously — leaving no safe haven to draw from.
Strategy 03
Spend less when your portfolio is stressed, more when it's growing. Theoretically sound and mathematically effective.
The Ceiling
It requires flexibility most retirees don't have. Healthcare, housing, and groceries aren't optional. "Reduce withdrawals by 20%" is a theory that meets real life at the checkout line.
Strategy 04
Cover essential expenses with guaranteed income — Social Security, pensions, or annuity income — so your portfolio never needs to perform to pay this month's bills.
The only strategy that removes the root cause: forced selling during downturns. The other three manage around the problem. This one eliminates it.
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Total savings — IRA, 401(k), brokerage
Amount withdrawn each year for living expenses
= 8.0% withdrawal rate — above the 4% safe rate guideline
How long you've been drawing from savings
Just retired
All four conventional strategies manage sequence risk around the edges. The income floor strategy eliminates the root cause.
The core idea: if your essential monthly expenses are covered by income you don't have to sell anything to receive — Social Security, a pension, or guaranteed income from an annuity — then a market crash doesn't force you to liquidate. Your portfolio can ride out the downturn because you don't need it to pay this month's bills.
This is one of the most powerful structural shifts available in retirement planning — and it's achievable for most retirees with the right combination of sources.
Essential Expenses: $4,200/mo
Housing, food, healthcare, utilities — costs that cannot be deferred regardless of market conditions.
Income Floor: $2,400 Social Security + $1,800 Annuity Income = $4,200/mo guaranteed
Guaranteed income covers essential expenses completely. No market performance required.
Result in a Crash: Portfolio stays invested. No forced selling. Full recovery captured.
Sequence damage is eliminated — because the mechanism that causes it (forced selling) has been removed.
Not all annuities solve the same problem. Here's an honest comparison — including what each type does well and where it falls short. No company recommends more than one type, because they each only sell one. We don't have that constraint.
| Annuity Type | Sequence Risk Protection | Best For | Key Tradeoff |
|---|---|---|---|
|
Income Annuity (SPIA) Single Premium Immediate Annuity |
Guaranteed income for life regardless of market. Eliminates the need to withdraw from portfolio entirely for covered expenses. | Retirees who want maximum income certainty and have other assets for liquidity and growth. | Irrevocable. Limited liquidity. No upside participation. Must size carefully. |
|
Fixed Index Annuity + GLWB With Guaranteed Lifetime Withdrawal Benefit rider |
Floor of 0% (no market loss). Guaranteed withdrawal income that grows at a contractual rate regardless of index performance. | Retirees who want both downside protection and some growth potential, with a guaranteed income floor. | Rider fees reduce growth. Cap rates limit upside. Complex — requires careful comparison across carriers. |
|
Multi-Year Guaranteed Annuity (MYGA) Fixed rate, fixed term |
Protects a portion of assets from market risk during the fixed term. Does not provide lifetime income on its own. | Retirees building a 3–7 year income bridge, or protecting a portion of assets from volatility near retirement. | Term-limited. Does not provide lifetime income on its own. Must be paired with other income strategy. |
Independent Analysis
Not sure which type is right for your situation?
We can show you how each option would work with your specific numbers — across the carrier market, with no obligation and no product to push.
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The questions retirees ask us most often about sequence of returns risk.
It's the risk that bad market timing, specifically large losses early in retirement while you're withdrawing money, can permanently damage your portfolio in a way that even a strong recovery can't fully fix. The order of returns matters as much as the average return. Two retirees with identical lifetime returns can end up with completely different outcomes based solely on when the bad years hit.
The danger zone is generally the 5 years before and 5 to 10 years after retirement: the period when your portfolio is at its largest relative to your lifetime withdrawals, and when you have the least time to wait out a prolonged downturn. If you're within 10 years of your planned retirement date, sequence risk should be an active part of your planning, not an afterthought.
Yes — but the mechanism matters. An annuity protects against sequence risk not by guaranteeing market returns, but by covering your essential expenses with income that doesn't require you to sell anything. When you don't have to liquidate investments during a crash, your portfolio can stay invested and recover. A fixed index annuity with a GLWB rider or an income annuity (SPIA) are the most direct tools for this purpose. A MYGA alone doesn't provide the same protection — it's a fixed accumulation vehicle, not a lifetime income guarantee.
The 4% rule is a useful starting point, not a guarantee. It was derived from historical data through the mid-1990s and assumes a 30-year retirement. Morningstar's current research suggests a more conservative 3.8% starting rate given today's conditions. More importantly, the 4% rule doesn't account for how you'll behave during a crash — many retirees who "planned" to stick to a withdrawal rate couldn't when their portfolio dropped 30–40%. A guaranteed income floor removes the behavioral risk from the equation entirely.
Delaying Social Security from 62 to 70 increases your monthly benefit by roughly 76–80% — and that income is guaranteed, inflation-adjusted, and lasts for life. Every dollar of Social Security income you receive is a dollar you don't have to withdraw from your portfolio. Maximizing your Social Security income floor is one of the most powerful sequence risk mitigation strategies available — and it costs nothing. Some retirees use an income annuity as a "bridge" strategy, funding years 62–70 from the annuity while delaying Social Security to lock in the maximum benefit.
The 60/40 portfolio's protective logic relies on a historical negative correlation between stocks and bonds — when one falls, the other typically rises. In 2022, the Federal Reserve raised interest rates at the fastest pace in 40 years to combat inflation. Rising interest rates cause existing bond prices to fall. So stocks fell on valuation concerns and bonds fell on rate increases simultaneously — a combination not seen since 1969. This doesn't mean the 60/40 portfolio is permanently broken, but it does demonstrate that diversification across two correlated-in-rising-rate-environments asset classes is not a complete hedge. Guaranteed income is the only asset class that was truly uncorrelated in 2022.
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Social Security Bridge Strategy
Delaying Social Security from 62 to 70 increases your monthly benefit by roughly 76–80% — and that income is guaranteed, inflation-adjusted, and lasts for life. Every dollar of Social Security income you receive is a dollar you don't have to withdraw from your portfolio.
Maximizing your Social Security income floor is one of the most powerful sequence risk mitigation strategies available — and it costs nothing. But you have to fund the years between early retirement and age 70 with something.
Some retirees use an income annuity as a "bridge" strategy — funding years 62–70 from the annuity while delaying Social Security to lock in the maximum lifetime benefit. The annuity cost is often more than offset by the permanent increase in guaranteed lifetime income.
The Social Security + Annuity combination:
A temporary annuity bridge (ages 62–70) + maximum delayed Social Security = a permanent, inflation-adjusted income floor that can eliminate sequence risk for most of your essential expenses for life.