Most investors spend decades concentrating on one figure: average annual return. They believe that getting the average right will make retirement straightforward. However, for anyone withdrawing income from a portfolio, average returns are only part of the story—and arguably the less crucial part.
The other half is sequence. The order in which returns arrive during the early years of retirement can permanently change outcomes, even if long-term averages end up the same. It’s one of the least-discussed risks in retirement planning, and with the S&P 500 currently experiencing five consecutive weeks of losses and down about 5% year-to-date as of late March 2026, it’s especially relevant for investors who retired in the past year or two and are now taking withdrawals in a declining market.
What Sequence of Returns Risk Actually Means
Here's the core issue. Two retirees can hold identical portfolios, earn the same average return over 20 years, and still end up with drastically different account balances, simply because one faced losses early in retirement while the other faced them later.
The reason is asymmetry. When a portfolio takes a large hit in year one or two of retirement while the investor is also making withdrawals, the account loses both value and shares that could have recovered. The remaining assets now have to generate growth on a permanently smaller base. Gains in later years apply to fewer dollars. The math never fully recovers.
Conversely, a retiree who sees strong early returns builds a larger foundation before withdrawals impact savings, allowing them to withstand future losses more comfortably.
This is not just a theoretical concern. Research by Wade Pfau, Ph.D., CFA, a professor of retirement income at The American College of Financial Services, has directly quantified the impact: the compounded return in the first ten years of retirement accounts for about 77% of the final retirement outcome. His research also shows that actual wealth and sustainable withdrawal rates differ significantly among retirees, not based on their actions or decisions, but simply due to the specific sequence of investment returns they experience during their career and retirement.
In other words, two retirees making identical decisions can end up with very different outcomes entirely due to timing they can't control.
Why the Current Environment Makes This More Than Academic
After three consecutive years of strong gains, including a 17.9% total return in 2025, the S&P 500 has encountered difficulties in early 2026. The index is approximately 5% lower year-to-date, has suffered five straight weekly losses, and recently fell below both its 50-day and 200-day moving averages for the first time since 2023. Geopolitical uncertainty and inflation worries are adding to the pressure.
For investors who retired in 2024 or 2025 and are now drawing from their portfolios in this environment, the sequence risk dynamic is no longer hypothetical. They are experiencing it firsthand, selling assets at low prices to fund withdrawals, which permanently decreases the number of shares available to benefit from any future recovery.
This does not mean those investors are necessarily in trouble, but it is exactly the scenario that tests whether a retirement income plan was designed to withstand poor sequencing or just average sequencing.
The Standard Defenses and Their Limits
Investors and advisors have created multiple tools to handle sequence risk, but none is fully comprehensive on its own.
Cash buffers. Holding one to three years of living expenses in cash or short-term instruments means the investor does not have to sell equities at depressed prices during a downturn. The drawback is drag. Idle cash underperforms during bull markets and erodes real value through inflation.
Bond allocation. A traditional 60/40, or more conservative, equity/fixed-income split reduces portfolio volatility and provides assets to draw from during equity drawdowns. The challenge is that bonds and equities have shown higher correlation during inflationary periods, limiting their hedging effectiveness precisely when it matters most.
Dynamic withdrawal strategies. Reducing withdrawal amounts during down years helps preserve capital but requires spending flexibility that many retirees, especially those with fixed expenses, simply lack.
Delay Social Security. Pushing Social Security to age 70 maximizes the guaranteed benefit and lowers the amount that must be withdrawn from the portfolio in early retirement. This is one of the most effective options available, but it requires interim bridge income from somewhere.
Each of these strategies lowers sequence risk without completely removing it. For investors seeking a portion of their income to be completely protected from market timing, the structure needs to be something that doesn't fluctuate with the portfolio's value at all.
Where Annuities Fit and Where They Don't
A guaranteed income floor significantly alters the risk calculation related to sequence of returns. If a retiree's essential expenses are covered by income sources that are not dependent on portfolio performance—such as Social Security, a pension, or an annuity—the portfolio's equity allocation can focus on long-term growth instead of short-term income needs. As a result, forced selling during market downturns is no longer necessary.
This is where fixed and fixed-indexed annuities come into play as a portfolio construction tool rather than as standalone products. Their purpose isn't to replace the entire portfolio but to reduce sequence risk for the income portion that can't afford to be variable.
For investors considering this approach, AnnuityVerse serves as a resource for understanding how these products fit into a broader retirement income strategy, including fee structures, surrender periods, and how income riders interact with account value.
The trade-offs are real. Liquidity is limited, upside participation is capped in most indexed products, and costs can vary significantly depending on the product type and rider choice. An annuity isn't the right tool for assets that the investor may need quick access to or for growth-focused capital that can tolerate market risk without income pressure.
But for the part of a retirement portfolio responsible for covering monthly expenses, a guaranteed income instrument reliably eliminates sequence risk from that portion. This specific and valuable role is especially important for investors in the early withdrawal phase during volatile market conditions.
The Practical Takeaway
Sequence of Returns risk does not get the attention it deserves in most retirement planning conversations, which tend to focus on accumulation rather than distribution mechanics. The shift from building a portfolio to drawing from it changes the math in ways that average return projections simply do not capture.
Investors approaching or entering retirement in a volatile market environment should pressure test their income plan against a bad sequence scenario, not just an average one. If the plan only works if early returns cooperate, it needs structural adjustment.
That adjustment does not have to involve an annuity. But for investors who want a guaranteed floor on their income regardless of market timing, the math is worth running.
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