Sequence of Returns Risk: Can an Annuity Help During a Downturn?

What happens if the market falls just as your paychecks stop and your retirement withdrawals begin?

The concern is understandable. During your working years, a lower account balance may be uncomfortable without changing how you pay next month’s bills. In retirement, those bills may require selling investments that have already declined. A later recovery then has less money to work with.

That is the practical problem behind sequence of returns risk. Investment results matter, but so does their order when money is leaving the portfolio. An annuity can help address part of that problem if its income reduces the withdrawals that you need from investments. It also requires committing money, accepting contract conditions, and considering the financial strength of the insurer.

A retirement withdrawal plan should work through difficult markets, not depend on predicting the next recovery.

Why the order of returns changes the result

Schwab’s January 2026 explanation of this risk is centered on losses and withdrawals on retirement. If assets have been sold off early, recouping the loss may be more difficult due to fewer assets being invested.^⁠[1]

Consider an original, simplified example. A man and woman both retire with $100,000 and withdraw $6,000 at the beginning of each year. Each have 1 year of a 20% loss followed by 1 year of a 25% gain. Excluding taxes, fees and inflation; the sequence is easy to see.

The first one to go on the streets is the first one to lose. After withdrawing $6,000, the remaining $94,000 falls to $75,200. The next year’s withdrawal leaves $69,200, which grows by 25% to $86,500.

The second person to retire is the one who reaps the benefits. The initial $94,000 grows to $117,500. The second withdrawal reduces the balance to $111,500 and the 20% withdrawal reduces the balance to $89,200.

Same two returns and withdrawals, different order; hypothetical dollars.

Measurement	Loss first	Gain first
Starting balance	$100,000	$100,000
End of first year	$75,200	$117,500
End of second year	$86,500	$89,200
Total withdrawals	$12,000	$12,000

Without withdrawals, both sequences would finish at $100,000. With withdrawals, the ending values differ by $2,700. This illustration does not predict retirement outcomes; it isolates why averages alone cannot describe a spending portfolio.

Start with the bills that cannot wait

Before you add a product to your list of purchases, think about what you won’t be able to give up in a down economy. Those are the costs that should be in that discussion, namely housing, groceries, insurance, utilities and basic transportation. Travel and gifts may have a strong significance, but they will typically provide different timing options.

Then, list reliable income that is already in place, with cash after the expected taxes and deductions. Include Social Security and any pension, making note as to what continues after a spouse’s death. Don’t assume that an expected potential investment income is a monthly income.

Assume essential spending is $3,500 per month and current net income is $2,400 per month. The rest of the funds required are $1,100 per month or $13,200 per year. This gap can be a tangible foundation for retirement income planning strategies. It’s better to decide that you want to invest a certain amount of savings rather than a percentage of savings because this will make you feel more at ease when the market headlines are scary.

How annuity income can reduce withdrawal pressure

A fixed direct income contract can be a contract that gives a premium in exchange for an income granted at a time to come in accordance with the terms of the contract. The coverage features options of one life or two lives, and there may be extra coverage in certain policies.^⁠[2]

Suppose that you have a contract that would provide guaranteed retirement income of $900 per month, excluding any estimated tax. The use of the portfolio would then be $2,400 per year for essential monthly spending, or $200 per month, rather than the $13,200. The switch may mean fewer will be sold in a tough market.

The missing number is crucial: how much premium would purchase that income? The above are budgeting estimates only and not a quote. The premium lowers the assets available elsewhere and payments will be based on different ages, the options of payments, their timing, and what the insurer is offering. The smaller portfolio needs to be reflected in a fair comparison in the same way as the smaller income.

The contract must match the protection you expect

An annuity doesn’t necessarily provide fixed periodic payments over a lifetime. Some products focus on accumulation; others on income. There are set amounts to pay and also amounts based on investments or conditions that are optional guarantees.

For instance, within a variable contract one can see a reduction in investment choices. An optional withdrawal benefit could be used to satisfy a particular income requirement and not affect its account worth. The SEC states that the insurance aspects and risks of investing in the insurance must be considered separately.^⁠[3]

Ask when payments begin, whether they last for life, and what happens if either spouse dies. Also inquire if increasing the amount taken diminishes future benefits. The term guaranteed retirement income should create an exact picture of what is being guaranteed, the obligations of the issuer, etc., and not give a speculative notion that all of retirement life is guaranteed.

Keep emergency access in the calculation

A fixed monthly salary is not enough to cover all of the costs. A replacement roof, a family emergency or a huge dental bill can call for a lump sum. When an exorbitant contract amount is being paid with restricted access, there can be a shortfall in cash.

Think about what it’s going to be like once the home is bought. What money is there that is easily accessible? Which account would you pay a big bill out of? Does the withdrawal involve any surrender charge, a reduction in protected income or otherwise selling investments at an inconvenient time?

The rights of the reserve may be determined by the responsibilities and other resources a household has. No single cash balance will work for all people. Keeping cash on hand might decrease selling pressure right now, and purchasing-power and opportunity costs are involved. Examine these tradeoffs directly and not just as a binary choice between full liquidity and full commitment.

Plan for prices rising while payments stay level

A consistent payment may be less beneficial as costs rise. A cost of $900 now is approximately $1210 in ten years with an annual inflation rate of 3%. If a payment was made at level $900 there would be a larger gap.

Some contract provides increasing payments or possibly extras options to solve this concern. Starting income and/or cost can be influenced by those, and the increment can be higher than the true increment in inflation. Look at the overall payment plan and guaranteed payouts, not just the initial deposit.

Be sure to distinguish gross and net income as well. Tax treatment depends on the account and funding arrangement; an advertised payment is not necessarily the amount available for groceries. The IRS distinguishes fully taxable payments from payments that include a recovery of previously taxed contributions.^⁠[4]

Other tools deserve a place in the conversation

People looking to protect retirement savings from market crash scenarios often want a single solution. In practice, the plan may combine several choices: a suitable investment mix, accessible reserves, flexible discretionary spending, and carefully timed income decisions.

Social Security timing is one example. Delayed retirement credits increase benefits after full retirement age up to age 70, although the right claiming choice depends on health, household finances, and survivor considerations.^⁠[5] Compare that decision alongside private income options rather than examining each in isolation.

Flexibility with the expenditure is another important thing to consider. Prior to the weak year determine those items that can be delayed and which ones cannot be. This is simpler to discuss which is calmed before a downturn than when an account assertion has just arrived. The intent is to lower the hasty decisions, but not to pretend that diversification and flexibility would stop all losses.

Decide how withdrawals will respond to a setback

A fixed dollar withdrawal becomes a larger percentage of savings when the portfolio shrinks. An illustrative $20,000 annual withdrawal is 4% of $500,000, but 5% of $400,000. Those percentages are arithmetic, not recommended withdrawal rates or assurances that either amount is sustainable.

Discuss what would trigger a spending review before the numbers become uncomfortable. You might reassess discretionary purchases, consult your investment professional, or update income projections. The response should reflect your whole situation, including taxes and contract restrictions.

Agree on who makes that review and which information they need. A spouse should understand the process too, particularly if one person normally handles the investments. Writing down the procedure reduces the chance that a frightening headline becomes the sole reason for an irreversible decision. It also allows you to distinguish a temporary spending adjustment from a change that requires a broader retirement plan review. Include a realistic date for reassessment.

Test the plan before a difficult year arrives

If you want to protect retirement savings from market crash scenarios, ask for comparisons showing an early downturn, a prolonged weak period, and a longer retirement than expected. Include contract costs, the premium removed from investments, future spending increases, and the income available to a surviving spouse.

Review the result in ordinary language. Can essential bills still be paid? Is emergency money available? What spending would change? What would trigger a review? A favorable average return is less reassuring if those questions remain unanswered.

Bring your spending gap and existing income details to Money Man 4 Integrity for a discussion of whether annuity income could play a useful role in retirement income planning. Coordinate the decision with investment and tax professionals where appropriate. The aim is a retirement budget that can tolerate uncertainty, with clear tradeoffs you understand before market conditions test them.

General education only; not individualized financial or tax advice. Guarantees depend on the issuing insurer’s claims-paying ability and the applicable contract terms.