Building Portfolios Against Shifting Markets

What happens when retirement is no longer a far-off idea?

by Eric Thomes

We’ve seen historic levels of market volatility recently. In just one week this April, new records were set for the top five largest intraday point swings of all time for the S&P 500 Index.

While accumulating money for retirement, we often tell clients to tune out swings in the market because investing for retirement is a long-term goal. The main message is routinely, “stay the course” – time in the market beats timing the market.

But what about when retirement is no longer a far-off idea?

Clients who are in the “fragile decade” – the five years before and after retiring – are susceptible to market volatility derailing their retirement through sequence of returns risk. A poor sequence of returns during those few years, especially when taking income, can make a difference between a comfortable retirement and potentially outlasting their funds. Outside of this “fragile decade,” sequence of returns risk will have less of an impact on a portfolio.

This taps into a very real fear – 64% of Americans worry more about running out of money than death, according to the 2025 Annual Retirement Study* from the Allianz Center for the Future of Retirement, part of Allianz Life Insurance Company of North America. Economic uncertainty about inflation, Social Security and taxes contribute to this fear.

When markets are going up, clients may be hesitant to reduce risk in their portfolio – they don’t want to miss out on potential gains. In this moment of heightened awareness of market volatility, it may be an important time to talk about the risk posed by a negative sequence of returns to a retirement strategy.

Illustrating Sequence Of Returns Risk

When designing retirement income plans, an average rate of return is often used. But that can obscure the potential effects of the sequence of up and down years over time.

Here’s a hypothetical example that can help illustrate sequence of returns risk.

Let’s say your client is retiring with a $1 million nest egg and plans to withdraw 5% per year, assuming a 3.5% adjustment for inflation. We will assume an average return of 6% for two scenarios where the results vary based on if the market is up or down at the beginning of retirement.

If the client retires and starts withdrawing income from their portfolio in an up market with high returns early on, their savings would last 36 years with an average return of 6%.

But, if they retire in a down market with low early returns, those market losses may not be able to be recovered. So, their savings may only last 23 years with that same average return of 6%. That’s a 13-year difference in how long retirement savings would last just because of when down years occur. Just because of when they retired, and started taking income, during a market cycle.

Addressing Sequence Of Returns Risk In A Retirement Strategy

Clients don’t get to choose into what type of market they will retire. So, addressing sequence of returns risk in a retirement income plan can be key to achieving long-term financial security. What’s more, this type of systematic risk may not be reduced through diversification alone.

When designing a strong retirement income strategy, reliable streams of income are often earmarked to pay for essential expenses in retirement. That way, your client knows that they will be able to pay their basic bills, no matter what happens in the market. Reliable income streams can include Social Security, a pension or an annuity.

An annuity can help even out the effects of an unfavorable sequence in market volatility. By allocating a portion of volatility-prone assets into a guaranteed income product such as an annuity, clients can gain a reliable stream of income during retirement with income benefits that may have an additional cost. An annuity offers tax-deferred growth potential, a death benefit for beneficiaries during the accumulation phase.

Illustrating The Effect Of An Annuity

Sequence of returns risk can be addressed with a level of buffer protection to help minimize or reduce the effect of an economic recession or depression. Annuities can offer various levels of downside protection against market losses through index strategies such as buffers, floors (including 100% protection) against negative index returns.

Here’s an example of how an annuity could have diminished the effect of market losses after the dot-com bubble burst in 2000.

After the technology bubble burst, the effect was felt through the overall market. The S&P 500® Index was down 10.1%, 13% and 23.4% in 2000, 2001, and 2002, respectively. For those near or recently retired, that negative sequence of returns could have had a significant impact on their overall portfolio and ability to make their money last their lifetime.

If an annuity with a 10% buffer was part of the strategy, then that portion of the portfolio would have been cushioned from full market exposure. The value in that annuity with a 10% buffer would have only gone down—due to negative index returns—1%, 3% and 13.4% in those same years.

Beyond those benefits, some annuities also offer the ability to lock in a value during a contract term that can help clients capture potential gains or reduce a loss. Some annuities also offer the opportunity for increasing income payments. These features can help smooth the ride through retirement.

Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. With that, it is important to select an annuity carrier that has strong and stable ratings and planning to be around for the long-term. In a market downturn, that’s when it may be more important to clients than ever for their annuity carrier to be there for the long run.

Seek Reassurance In Retirement With Protection

Addressing sequence of returns risk is a key part of a retirement strategy. Reliable income streams from an annuity can provide a cushion against market downturns and help ensure that a client’s money will last their lifetime. In volatile markets, make sure your strategies can withstand both the ups and the downs.