Can a fixed index annuity help protect against the sequence of returns?

People typically think of the average rate of returns when it comes to investing or sustaining their retirement income. However, what might be more impactful is not the average return but the order of returns and how this could potentially impact retirement savings.

What is sequence of return risk?

Sequence of return risk, or sequence risk, occurs when retirees face negative market returns shortly before or right after retirement. Suppose a market downturn occurs during this time period. In that case, it can potentially significantly impact retirement savings and an overall financial portfolio since there is less time to recover from those losses.

Let’s compare two hypothetical situations. In both scenarios, $500,000 is saved for retirement.In the two hypothetical examples, scenario A begins withdrawing in 1998, and scenario B begins taking withdrawals just two years later in 2000. You would expect both to have an equal depletion of their assets and run out of money two years apart, but this is not the case because of the sequence of returns.Twenty-one years later, with just a difference of two years from when withdrawals started, scenario A still has over $100,000, while the account in scenario B is depleted by year 15.

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