Episode 20: Annuities vs. The Sequence of Returns Risk

Another major retirement mistake I see is a lack of awareness of the “Sequence of Returns Risk.”

Every day I speak with clients, and one of the hardest things I must convince them to accept is that it’s no longer about chasing the highest interest rates. You see, most of my clients are retired or very near retirement. They are in the so-called “fragile decade,” which is the five years before retirement and the five years after. This decade could have devastating effects on your assets if you enter retirement in a bear (declining) market. This risk is known as the “Sequence of Returns Risk.”

If you compare the whole of your retirement to the analogy of climbing Mount Everest, the ascension of the mountain is the part of your life that you have been saving and investing – this is when you have time to recover from setbacks in the market and can afford some risk because you are still working and have another source of income. Now that you are retired, or nearing retirement, you are at the summit and can see the vast horizon that is full of the adventure and excitement that you hope to enjoy for the rest of your life. However, to advance towards that horizon, you must get down the other side of the mountain. This side of the mountain is analogous to never running out of money, no matter how long you and your spouse live (hopefully for a very long time and in good health).

What most of my clients find interesting with this analogy is that approximately 85% of the people who have perished on Mount Everest died on the way back down! Mainly from getting stuck in a storm and running out of oxygen. Think of your retirement money as oxygen – you don’t think about it that much when you have enough, but you start to panic when you feel it is lacking.

The question then becomes, how willing are you to risk your oxygen? Regardless of the return that your “money guy” speculates (guesses), he can get you with a traditional retirement plan (i.e., diversified portfolio of stocks, bonds, and mutual funds), you will only be able to withdraw a certain percentage from the pile of money you have accrued at the point of your retirement start date. What is that percentage? According to the Monte-Carlo simulations, it is 4%. Unfortunately, a surprisingly large number of people are unaware of this and remain under the impression that they will be able to live off interest returns while keeping their principal intact.

If you think this is terrible news, it gets worse. According to Dr. Wade Phau, the new safe withdrawal rate is 3%. That’s if you want a 90% chance of your money lasting for 30 years.  So, read that carefully.  A 3% withdrawal rate still does not guarantee that you won’t run out of money.

But wait, it gets worse!

You also have to factor in a reduction of 0.5% for every 1% in fees that you are paying. Now, the person who is only paying 1% in management fees (most people pay more) can only safely withdraw 2.5%. That means the person who has sacrificed and saved and invested wisely throughout their career can only safely spend $2,500 for every $100,000 they have saved for retirement. And there is still no guarantee that your money will last the rest of your life.

Can you feel the oxygen leaving the room? Is there another option that will allow you to spend MORE of your money AND give you a GUARANTEE that you will never run out of income, no matter how long you and your spouse live?

There is! It’s called a Fixed Indexed Annuity with an Income Rider.

There is a very high likelihood that if you and your spouse are over the age of 60, an appropriate annuity will provide a guaranteed lifetime income that has a payout rate of 4% or higher.

In this week’s episode of the ATLAS Annuity Podcast, we look at several case studies where the sequence of returns risk leaves zero dollars at points in life where it’s too late to save the portfolio.

I also put the numbers together for the exact same scenarios where using an income annuity not only solves income problems but also protects against inflation and emergencies.

Make sure to give it a watch or listen, and if you have any questions, schedule an appointment by using the CONTACT button to get on my calendar.

All the best,


Podcast Episode 20: Annuities vs. The Sequence of Returns Risk

Listen to Episode 20: Annuities vs The Sequence of Returns Risk on Apple Podcast

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