Sequence of returns risk is the risk that bad market years come early in retirement, while a client is taking withdrawals. Two retirees can earn the exact same average return and end up with very different results, simply because the losses came in a different order. It matters most in the first years of retirement, which is why it belongs in every retirement income conversation.
Key takeaways
- Sequence of returns risk is about the order of returns, not the average.
- It matters most once withdrawals start, especially in the first years of retirement.
- Losses take bigger gains to recover: a 20% loss needs a 25% gain to break even.
- Protecting a portion of retirement money from market loss can soften the damage of early bad years.
What is sequence of returns risk?
While a client is saving, the order of returns doesn’t change much. A bad year early on just means buying at lower prices, and there is time to recover. Once withdrawals start, the order matters a lot. Money taken out after a loss is gone for good, and it can’t be there when the market recovers.
We describe it as climbing the mountain versus getting down it. The accumulation years are the climb: save, invest and recover from bad years. Retirement is the way down. Most of the attention in the financial industry goes to the climb, and far fewer people talk with clients about getting down safely.
A simple way to picture it
Picture two retirees who start with the same savings, take the same withdrawals each year and earn the same set of yearly returns over retirement. The only difference is the order: one gets the strong years first and the losses later, and the other gets the losses first and the strong years later.
Their average return is identical, but their results are not. The retiree who takes losses early is selling investments at lower prices to fund withdrawals, so less money is left to benefit when the market recovers. In many scenarios like this, that retiree runs out of money years sooner. This is a concept illustration, not a projection of any product or portfolio.
No one has a crystal ball. A client controls when they retire, but not the returns they get in their first few years of retirement.
Why losses hurt more than gains help
After a loss, a smaller balance has to grow by a bigger percentage just to get back to where it started. The math is simple: the gain needed equals the loss divided by (1 minus the loss).
| Loss | Gain needed to break even |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
Those break-even numbers are before any withdrawals. When a retiree is also taking income out, the climb back is steeper still.
How to explain it to a client
Keep it short and ask a question instead of making a statement:
“No one controls what the market does in their first few years of retirement. Can I show you why the order of returns matters as much as the average?”
Then walk through the two-retiree example, and ask how much of their retirement money would have to be sold after a loss in those first years. You’ll find more openers like this in How to bring up annuities with clients.
Ways to manage sequence of returns risk
There is more than one tool. Common approaches include keeping a cash reserve for the first years of withdrawals, being flexible about how much is withdrawn after a bad year, and protecting part of the portfolio from market loss. An annuity is one way to do the last one:
- Fixed and multi-year guaranteed annuities (MYGAs) credit a rate declared or guaranteed by the insurer, so their value isn’t tied to market performance. Surrender charges and market value adjustments can still apply to withdrawals during the surrender period.
- Fixed indexed annuities credit interest based on an index, up to a cap or participation rate, and credited interest is typically 0% in a down index year. Credited interest usually locks in each contract year, but rider fees, surrender charges or an adjustment can still reduce the value.
- Income riders and income annuities can provide income the client can’t outlive, so less has to come from the market in a bad year.
There is no standard allocation. Any recommendation has to be based on the client’s income needs, liquidity, time horizon and other assets, and documented under best-interest standards. Guarantees depend on the issuing company’s financial strength and claims-paying ability, and withdrawals above the free amount during the surrender period can carry surrender charges.
Get the Annuity 101 cheat sheet
Our free Annuity 101 cheat sheet for agents includes this example, 11 conversation openers and an intake checklist. You can also watch Agent Annuity 101 on YouTube. When a client is ready, send us the basics through the annuity quote request and we’ll design the case with you. See all the annuities we place on our annuities page.
Frequently asked questions
What is sequence of returns risk?
It is the risk that market losses come early in retirement, while withdrawals are being taken. Two retirees with the same average return can have very different results depending on the order of the returns.
When does sequence of returns risk matter most?
In the years just before and just after retirement, when the balance is usually at its largest and withdrawals are starting.
Does a good average return protect against it?
No. Two retirees with the same average return can get very different results if one of them takes losses early, while withdrawals are being made.
How can an annuity help with sequence of returns risk?
Fixed, multi-year guaranteed and fixed indexed annuities aren’t invested directly in the market, so money placed in one isn’t sold at a loss after a market drop. Surrender charges, adjustments and rider fees still apply, and guarantees depend on the insurer. An income rider or income annuity can also cover part of a client’s income.
General information, not tax or legal advice. Annuities are not bank deposits and are not FDIC-insured. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Product features, caps and rates vary by carrier, contract and state.
Reviewed by Tim Fuller on 2026-10-14
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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