How to Protect Your Retirement Savings from Market Risk

Sequence of returns risk is the danger that a market downturn happens at the worst possible time: right before or right after you retire. When you are withdrawing money from your portfolio during a downturn, losses are magnified because you are selling assets at depressed prices.^[1]

Consider this illustration. Two retirees both start with $1 million and withdraw $50,000 per year. One experiences strong market returns in the first five years, while the other faces a bear market. After 20 years, the first retiree may still have a substantial balance. The second retiree may have depleted their savings entirely, even though both experienced the same average returns over the full period. This is a simplified example for illustration purposes; actual results depend on specific market conditions, withdrawal rates, and other factors.

This is not a hypothetical concern. Retirees who began withdrawals during the 2000-2002 or 2007-2009 market downturns experienced the real impact of sequence risk. The S&P 500 declined approximately 37% in 2008 alone.^[2]

Annuities provide a form of principal protection that is unique among financial products. With a fixed annuity or MYGA, your interest rate is guaranteed regardless of market conditions. With a fixed indexed annuity, your principal is protected by a contractual 0% floor, meaning your account value will not decrease due to market declines.

This protection is backed by the insurance company's financial strength and reserves, regulated by state insurance departments. It is not dependent on market performance or economic conditions. However, it is important to understand that this protection applies to market risk only. Surrender charges may apply for early withdrawals, and the guarantees are only as strong as the issuing insurance company.

During the 2008 financial crisis, the S&P 500 dropped approximately 37%.^[3] Holders of fixed indexed annuities received 0% interest for that period, meaning their account values remained unchanged rather than declining. In subsequent years when the market recovered, their accounts participated in the gains up to the contract's cap or participation rate. Past performance does not guarantee future results.

Protecting your retirement does not mean avoiding all risk. It means being strategic about which portion of your savings is protected and which is positioned for growth. The following are general strategies that some retirees and their advisors consider. They are not recommendations and may not be appropriate for every situation.

Strategy 1: The Bucket Approach. Divide your savings into three time-based segments. The first segment (1-2 years of expenses) stays in liquid, low-risk accounts for immediate needs. The second segment (3-10 years of expenses) goes into protected vehicles like MYGAs and FIAs. The third segment (10+ years) stays invested in stocks and bonds for long-term growth potential.

Strategy 2: The Income Floor. Calculate your essential monthly expenses and create guaranteed income to cover them using Social Security plus an annuity. Everything above that floor can be invested more aggressively since your basic needs are already covered.

Strategy 3: The Percentage Guard. Allocate a portion of your portfolio to fixed or fixed indexed annuities and keep the remainder in diversified investments. The specific allocation depends on your age, risk tolerance, income needs, and other factors. This approach ensures that even a significant market decline affects only a portion of your total savings.