Article Summary:
This article explains sequence of returns risk—the impact that poor market performance early in retirement can have on long-term savings, especially when withdrawals are already underway. It explores how market downturns can affect retirement income and discusses how MYG Annuities may help provide stability by protecting a portion of savings from market volatility.
Many retirement savers think of compounding as a positive force over time. But in retirement, compounding can work both ways.
Market downturns can affect retirement savings differently once withdrawals begin. A significant loss early in retirement may reduce how much savings remain invested for future recovery and growth.
Financial professionals refer to this as sequence of returns risk. While the term may sound technical, the concept is relatively simple: poor market performance early in retirement can have a lasting impact on how long retirement savings may last.
Two retirement savers can experience the same long-term market returns and still end up with very different outcomes depending on when market downturns occur.
That’s because ongoing withdrawals can make it harder for portfolios to recover from market losses.
For people still working and contributing to retirement accounts, market declines may create opportunities to continue investing at lower prices while waiting for future recovery.
For retirees already relying on their savings for income, the situation can look very different.
David and Karen are 60 and 58 years old and plan to retire within the next several years.
Like many people, they still want long-term growth potential for their savings. But as they get closer to leaving the workforce, they’ve started reevaluating how much market exposure they want tied to the assets they may soon depend on for income.
A major market downturn shortly before retirement could affect:
To help reduce that risk, David and Karen decide to reposition a portion of their retirement savings into a Multi-Year Guarantee Annuity (MYG Annuity).
Their goal is not to move entirely out of market-based investments. Instead, they want to shield part of their portfolio from market volatility while adding more predictability during the years leading into retirement. You can explore this concept further in Planning for Financial Security: How Multi-Year Guarantee Annuities Could Work for You.
As retirement approaches, many savers begin prioritizing stability differently than they did earlier in life.
Michael and Lisa are 68 and 66 years old and recently retired.
Unlike David and Karen, they are already taking withdrawals from their retirement portfolio to help cover living expenses.
If a major market downturn occurs early in retirement, they may still need income from their portfolio while account values are declining. That can force retirees to sell investments at lower values to generate the same level of income.
Even if markets recover later, fewer invested assets remain available to participate in the rebound.
During the 2008 financial crisis, some retirement accounts took years to fully recover. In fact, someone invested in the S&P 500 at the start of the downturn would have needed roughly five years just to return to their original account value. You can learn more in Financial Flashback: How Smart Planners Weathered the 2008 Recession.
To help reduce pressure on the market-based portion of their portfolio during downturns, Michael and Lisa allocate part of their retirement savings to a MYG Annuity designed to provide:
Their strategy is designed to help maintain greater stability within a portion of their retirement income portfolio while reducing the need to sell market-based investments during downturns.
Learn more about evaluating liquidity and withdrawal flexibility in Accessing Funds from an MYG Annuity: What You Need to Know.
Imagine Michael and Lisa retired with a $1.5 million portfolio and planned to withdraw $60,000 annually from their portfolio.
If the market declined 20% early in their retirement:
|
Scenario |
Portfolio Value |
Annual Withdrawal |
Effective Withdrawal Rate |
|---|---|---|---|
|
Before Market Decline |
$1.5M |
$60,000 |
4% |
|
After 20% Decline |
$1.2M |
$60,000 |
5% |
The withdrawal amount stayed the same, but the percentage withdrawn from the portfolio increased after a downturn. That can reduce the portfolio’s ability to recover fully over time.
As they approach retirement, many people managing their own finances gradually adjust how portions of their portfolio are allocated.
The goal is not necessarily to avoid market-based investments entirely. Instead, some retirement savers balance growth-focused investments with products designed to provide more stability during the years surrounding retirement.
Because MYG Annuities are not tied to stock market performance, the value of the annuity is not reduced by market declines during the guarantee period.
For some people in or approaching retirement, protecting a portion of savings from market losses may help reduce the impact of volatility on their portfolio during important transition years.
Form Series: MYG24; AI20 (Forms may vary by state). CA Form: MYG16(04). Not FDIC/NCUA insured / Not a deposit / Not insured by any federal government agency / No bank/CU guarantee / May lose value
American National nor its agents give tax or legal advice. Clients should contact their attorney or tax advisor on their specific situation.