Sequence-of-Returns Risk: Why the First Decade of Retirement Matters

Written and reviewed by Hans Goldstein, licensed insurance producer, NPN 20602398 · CA Insurance License #4273294
Last reviewed October 3, 2026 · Published October 3, 2026

The takeaway: use annuities for what they are great at, income and protection, not as a tax-efficient growth account. Compare MYGA rates and SPIA rates, or get a free annuity review.

What sequence risk is

While you are saving, the order of returns barely matters: a crash early and a boom late lands you in about the same place as the reverse. Once you start withdrawing, order matters a great deal. Money you sell in a down year is gone; it cannot ride the recovery. This page is educational, not tax or investment advice.

Hypothetical: same five returns, opposite order, $1,000,000 start, $50,000 withdrawn at the start of each year

Hypothetical arithmetic, not a forecast and not based on any index. Both retirees average 3% a year over the five years and withdraw the same $250,000. Retiree A, who took the losses first, ends about $120,500 behind. Calculation: balance = (prior balance minus $50,000) x (1 + return).

Nothing about Retiree A's investments was worse. The losses simply came while the balance was largest and withdrawals were already running.

2008: the crash that rewrote many retirement plans

In 2008 the S&P 500 returned about negative 37% including dividends (negative 36.55% in Damodaran's series, Damodaran, NYU Stern: historical S&P 500 returns (updated 1/5/2026)), and it fell about 57% from its 2007 peak to the March 2009 low. People who retired just before it and kept withdrawing a fixed amount were selling shares near the bottom. Many who were 60 then could not have rebuilt the balance by working longer, and a retiree in their 70s today has even less time to wait for a recovery. That is why many retirees cannot afford another 2008 on the money they need for the next ten years of bills.

2022: when stocks and bonds fell together

The classic answer to stock risk is bonds. 2022 tested it: the S&P 500 returned about negative 18% (negative 18.04%, Damodaran, NYU Stern: historical S&P 500 returns (updated 1/5/2026)) and the broad US bond market lost about 13% (the iShares Core U.S. Aggregate Bond ETF returned negative 13.01%, iShares Core U.S. Aggregate Bond ETF (AGG), 2022 calendar-year return) as interest rates rose quickly. A balanced portfolio had nowhere to hide. Bonds still have a role, but the year showed that a 60/40 mix is not the same thing as an income guarantee.

What smaller 2023 RMDs reveal about timing

Required minimum distributions for 2023 were calculated from account balances on December 31, 2022, after that down year. For a 75-year-old, the Uniform Lifetime Table divisor is 24.6 (26 CFR 1.401(a)(9)-9 (Uniform Lifetime Table)). An IRA that was $1,000,000 a year earlier but $840,000 on 12/31/2022 produced an RMD of about $34,146 instead of $40,650 (hypothetical balances). RMDs start at age 73 today, rising to 75 from 2033 (26 U.S.C. 401(a)(9) (RMD age 73, rising to 75 from 2033)). A smaller RMD sounds like good news for taxes, but it is really a mirror of the problem: the account had shrunk, and anyone withdrawing more than the minimum to cover living costs was taking a larger share of a smaller balance. That is sequence risk showing up on a tax form.

Four ways to build in protection

1. An income floor. Cover essential bills (housing, food, insurance, taxes) with income that does not depend on the market: Social Security, a pension, a single premium immediate annuity, or a ladder of MYGAs that mature year by year. Guarantees depend on the claims-paying ability of the issuing insurer. See SPIA rates and MYGA rates.
2. A bond tent. Hold more bonds and fixed money in the years just before and after retirement, then shift back toward stocks. More in the bond tent and income floor.
3. A cash bucket. One to three years of spending in cash or short-term savings, so a bad year is spent from cash, not stocks.
4. Permanent life cash value as a buffer asset. In a down year, some retirees borrow from a well-funded policy instead of selling stocks, then let the portfolio recover. This works only if the policy has meaningful cash value and is managed so it stays in force: policy loans and withdrawals up to your basis are generally not taxed if the policy is not a modified endowment contract (IRC §7702A) and stays in force; a lapse or surrender with a loan outstanding can create taxable income. It is a death benefit policy first; see why life insurance is tax-smart.

The 4% rule and annuity replacement page shows how a floor changes how much you can safely withdraw from the rest.

What to do this week

1. Add up your essential monthly bills and the guaranteed income you already have (Social Security, pension).
2. The gap between them is the floor to cover. Get SPIA and MYGA quotes for that amount.
3. Decide how many years of spending you want outside the stock market before you need to sell anything.

How big should your income floor be?

Send your essential monthly bills and current guaranteed income. Within one business day you get SPIA and MYGA options that cover the gap, side by side.

Educational, not investment or tax advice.

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Rather talk it through? Or book 15 minutes on Hans’s calendar, or call 213-414-2808.

Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer

Frequently asked questions

Sources

1. IRS Publication 575: Pension and Annuity Income
2. IRS Publication 939: General Rule for Pensions and Annuities (exclusion ratio)
3. 26 U.S.C. §72 (annuities and certain proceeds), Cornell LII
4. IRS Topic 409: Capital gains and losses
5. IRS Rev. Proc. 2025-32 (2026 inflation adjustments)
6. Damodaran, NYU Stern: historical S&P 500 returns (updated 1/5/2026)
7. iShares Core U.S. Aggregate Bond ETF (AGG), 2022 calendar-year return
8. 26 CFR 1.401(a)(9)-9 (Uniform Lifetime Table)
9. 26 U.S.C. 401(a)(9) (RMD age 73, rising to 75 from 2033)