Overcoming Sequence of Returns Risk in Retirement

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What is Sequence of Returns Risk?

Sequence of returns risk refers to the danger that the timing of withdrawals from a retirement account will negatively impact the overall rate of return. This risk is significant, especially when you start making withdrawals from your investment portfolio or annuity at a time when market prices are declining.

Using Fixed Index Annuities to Protect Income

Fixed index annuities can be a tool to mitigate this risk. They offer a balance between growth potential and protection. Returns are tied to a stock market index but come with a guaranteed minimum interest rate, ensuring that your principal is protected from market downturns.

Sequence Of Returns Risk Illustration

Guaranteed Lifetime Withdrawal Benefits (GLWB)

Guaranteed Lifetime Withdrawal Benefits provide a way to ensure a steady income stream for life, regardless of market performance. This can be an add-on to an annuity contract, providing you with a certain percentage of your annuity’s value each year, regardless of the underlying investment performance.

Sequence Of Return Risk

Benefits of Using Fixed Index Annuities and GLWB

  1. Protection Against Market Volatility: They offer protection against market downturns, ensuring that your income is not adversely affected by poor market performance at the beginning of your retirement.
  2. Guaranteed Income Stream: GLWB ensures a steady income for life, which can help in budgeting and financial planning during retirement.
  3. Potential for Growth: While providing a safety net, fixed index annuities also offer the potential for growth based on stock market performance.
  4. Flexibility: Many fixed index annuities come with options for liquidity and death benefits, adding to their appeal.
What Is Sequence Of Return Risk

Comparison of Retirement Income Strategies

StrategyMarket RiskIncome GuaranteeGrowth PotentialLiquidity
Fixed Index AnnuitiesLowHighModerateVaries
Guaranteed Lifetime Withdrawal BenefitsNoneHighNoneLow
Traditional Stock/Bond PortfolioHighNoneHighHigh
What Is Sequence Of Return Risk

Conclusion

Using fixed index annuities and guaranteed lifetime withdrawal benefits can be a strategic way to protect your retirement income from sequence of returns risk. These tools offer a balance between growth potential and income stability, which is crucial for a worry-free retirement. By understanding and utilizing these financial products, retirees can better safeguard their future against market unpredictability.

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Sequence Of Returns Risk

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Frequently Asked Questions

What is the sequence of return risk?

The sequence of return risk is the risk that the order in which returns are received can affect the overall performance of an investment portfolio.

How does the sequence of return risk impact investors?

The impact of the sequence of return risk on investors can be significant. For example, a period of negative returns early in an investment timeline can significantly impact the overall performance of an investment portfolio, potentially reducing the number of funds available for future withdrawals.

How can investors mitigate the sequence of return risk?

Investors can mitigate the sequence of return risk by diversifying their portfolio, building a cash reserve, delaying withdrawals, and regularly rebalancing their portfolio.

How can I manage the sequence of returns risk?

You can take several steps to manage the sequence of returns risk, including diversifying your portfolio, considering annuities, and working with a financial advisor.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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