Let me paint a picture.
You've saved $600,000 in your retirement accounts. You retire at 65. You plan to withdraw 4% per year — $24,000 — to supplement Social Security.
In your first year of retirement, the market drops 30%.
Your $600,000 is now $420,000. But you still need to withdraw $24,000 to pay your bills. So you pull that out, leaving you with $396,000.
For the market to get you back to $600,000 from $396,000, it needs to gain over 51%. That could take years — all while you're continuing to withdraw.
This is called sequence-of-returns risk
It's not about whether the market recovers (it historically does). It's about when the losses happen relative to when you start withdrawing. A bad year early in retirement does far more damage than a bad year in the middle or toward the end.
Here's the uncomfortable truth: two people with identical savings, identical withdrawal rates, and identical average returns over 20 years can have dramatically different outcomes — simply based on the order of those returns.
Person A gets their bad years early and runs out of money at age 82. Person B gets their bad years later and still has money at 95. Same average return. Completely different results.
How some people address this
One approach is to establish an income "floor" — a portion of your monthly expenses covered by income sources that don't depend on the market. Social Security is one part of that floor. An income annuity can be another.
With a floor in place, you don't have to sell portfolio assets during a downturn to pay bills. Your essentials are covered. The portfolio can stay invested and recover on its own timeline.
It's the difference between being forced to sell low and having the choice to wait.
The question to consider
If the market dropped 30% in your first year of retirement, would your income plan hold up? If the answer isn't a confident "I'd be fine," that's worth exploring.
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Author of Indexed Annuity Secrets and founder of Pacific Ridgeway Insurance Solutions in San Diego. Navy veteran. Licensed financial professional, CA #4132743.
Fixed indexed annuities are insurance products, not investments. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. This article is for educational purposes only and is not financial, investment, tax, or insurance advice.