Chances are you’ve worked hard to accumulate a nest egg that will see you through retirement. Congratulations!

But even if that nest egg starts out sizable, your chances of running out of money in retirement are greater than you may realize. Here’s why:

  • You may live longer than you expect.
  • Inflation may erode your purchasing power.
  • Your investments may not generate the return you expected.
  • You may spend your money more quickly than you anticipated.

But perhaps the biggest risk of all is one I had never heard of until recently. The “preparing for retirement” books I read never mentioned it, my friends never discussed it and my financial advisor never brought it up. Perhaps you’ve never heard of it either.

It’s called sequence of returns risk.

Sequence of Returns Risk: What It is and Why You Should Care.

Everyone knows that the financial markets go up … and come down (… and go up … and come down).

So do your investments. However, the associated gains and losses are only reflected on paper until you sell. Once you do, however, you’ve “locked in” either a gain or a loss.

So, like all investors, you want to sell when your investments are up. That’s doable when you’re still earning a paycheck and aren’t dependent on the sale of your investments to pay your living expenses.

But what happens if circumstances force you to sell your stocks for less than you paid for them in order to have cash on hand?

That’s what many retired people find themselves having to do—and it can have a negative impact on the long-term value of their portfolios, especially if the stock market has a few bad years in a row right after a person retires.

The Timing of Distributions Makes a Difference.

Let’s take a closer look at two hypothetical portfolios to see the impact early losses can have later on.

As you can see, our two retirees start out in retirement with the same amount of money: $685,000. Each also withdraws 5 percent at the end of every year for the next 25 years. Yet the long-term results play out quite differently.

Let’s take a closer look.

Retiree A begins withdrawals in an up market. And while she has both up and down years after that, she ends up with more money in 25 years than she started with—approximately $815,000 more for a total of $1.5 million.

That’s good news for her, but Retiree B isn’t nearly as fortunate. Rather than early gains, he has early losses: -12 percent in Year 1, -21 percent in Year 2 and -14 percent in Year 3, quickly eroding his early balance. As a result, he runs out of money in just 13 years.

"Whether you already have a sizable nest egg or are just starting to nurture yours, one of the best things you can do is manage sequence-of-returns risk."

Protect Your Retirement Now.

Consider the following ways to help protect your retirement income today: 

1. Calculate the guaranteed income you’ll receive. This includes your Social Security and any pension income, as well as other reliable income sources such as spousal support or rental income.

2. Add in income you can safely take from your savings and investments. Here’s the rule of thumb most financial advisors recommend:

  • Add up the current value of your bank accounts, mutual funds, stocks and bonds. Include both your retirement and non-retirement accounts.
  • Subtract from that amount a “cash cushion” to pay your expenses for the next six months.

3. Establish a monthly budget. Once you know how much money you can safely spend each month, establish a monthly budget to ensure you live within your means.  

4. Meet with your financial advisor. Sound advice can be the key to making strong financial decisions. During the meeting, discuss your goals, review your portfolio and, if necessary, make adjustments to help ensure your nest egg will last.

5. Consider an annuity.* Simply put, an annuity can help you increase the value of your money by providing you protected lifetime income via a monthly “check” for a set number of years or even the rest of your life (with an optional benefit).† Learn more about why annuities and the protected lifetime income they offer should be part of your retirement planning.

Pursue Financial Confidence.

Whether you already have a sizable nest egg or are just starting to nurture yours, one of the best things you can do is manage sequence-of-returns risk.


*What is an annuity?

Annuities are long-term, tax-deferred investments designed for retirement. Variable annuities involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59 ½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity. Guarantees are backed by the claims paying ability of the issuing insurance company.

Annuities are not for everyone. And, it’s important to remember that these products are meant to be long-term investments designed for retirement, so there are restrictions in place to discourage you from withdrawing all of your money at once or taking withdrawals before age 59 ½. However, most annuities do allow for exceptions based on specific circumstances such as a terminal illness or other emergencies.

 Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity. 

Investing involves risk, including possible loss of principle. 

The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.

More from Author


Order Matters in Retirement

You can’t control how your investments perform, but you can control the order in which you withdraw them. Bev Bachel looks at sequence of returns risk—a factor that can have a big difference on your retirement funds. Learn more at the Financial Freedom Studio.

Tossing And Turning Over Your Retirement Plans

No matter where you are on your retirement journey, these five steps can help you enjoy the retirement of your dreams. Learn more at the Financial Freedom Studio.