Sequence of Returns Rate Risk – How Annuities Protect Against It

Investing comes with risks no matter where you choose to invest. But annuities are one of the safest ways to turn your money into a fruitful retirement fund.

Below are some helpful ways to mitigate the sequence of returns rate risk with annuities and other strategies.

What Is the Sequence of Returns Risk?

The sequence of returns risk refers to the potential damage to an investor’s overall return depending on the timing of withdrawals. In other words, the return date is a factor that impacts how much money you get from your investment.

You can experience the same average over time as another investor but receive a lower overall return simply because of the return’s timing. The sequence of returns rate risk can impact the trajectory of your retirement and how you manage your finances.

How Does This Impact Investors?

The sequence of returns rate risk can impact the value of any investment portfolio, but it’s especially detrimental to new retirees. Negative portfolio returns and continuous withdrawals can lower your portfolio value and leave you with little funds for the future.

Oftentimes, this damage is irreversible, causing a longevity risk. In this case, the risk to retirement accounts is great enough that you may outlive your savings.

The right timing is required if you plan on using your investment portfolio to provide you with a steady income through your retirement. Otherwise, you won’t have enough to cover costs, or you may have to sell your securities and take a loss.

Ways to Manage the Sequence of Returns Risk

Despite the overall risk to retirement accounts, there are steps you can take to protect your investments.

  • Diversify your portfolio: A diversified investment portfolio reduces the impact of the sequence of returns rate risk. Your portfolio should reflect your preferences, investment goals, and tax situation. This way, you won’t have to rely on a single investment.
  • Follow a phased retirement approach: phased retirement approach includes gradually easing into retired life. For instance, you work less but begin to use retirement benefits. This retirement approach helps you mitigate the sequence of returns rate risk.
  • Use a bucket strategy: One way to prevent negative returns is the bucket strategy. This investment approach involves dividing all of your income sources into three “buckets” for short-term, intermediate, and long-term goals. Establishing these goals helps you prepare for stock market functions.
  • Invest in annuities: Annuities are one of the best ways to prevent negative returns. They provide a guaranteed source of income, which is important when you no longer plan to work.
  • Consult a financial advisor: A financial advisor can help you make the best decision according to your current and future financial situation. They will review all of your options to help you set up a strategy to manage your sequence of returns rate risk.

Can Annuities Keep You Protected?

A well-diversified portfolio can be complemented by investing in annuities. Although there are a variety, a fixed index annuity is one of the best options to meet long-term retirement goals. These annuities are tax-deferred and offer flexibility when it comes to planning your retirement.

One of the biggest benefits of fixed index annuities is their protection against stock market volatility. They guarantee you and possibly your spouse a fixed income for the rest of your life, even when interest rates rise.

This type of annuity also comes with an annual reset feature which prevents the value from depreciating despite market downturns. This works by locking in interest credits each year to prevent the loss of gains.

Fixed index annuities are one of the safest investment options. However, one of the drawbacks of this investment is its link to the performance of underlying investments. While this is a concern when assessing the risk to retirement accounts, any investment option comes with some level of risk.

Key Takeaways

The sequence of returns rate risk is a concern for adults who are ready to plan for their retirement. Strategies to save, spend, and manage your money are just as important after you retire as they were before. That’s why it’s essential to assess any potential risk to retirement accounts before you start investing.

This is only one type of risk, but it’s one that can have a detrimental impact on your investment portfolio. This can prevent you from receiving the return you were relying on to get you through retirement and cause financial strain.

Fortunately, there are strategies to help mitigate this risk and keep your funds protected in the long run. Some of these include diversifying your portfolio, following an approach that aligns with your short and long-term goals, and investing in annuities.

With a combination of these steps and considerations, you will be in a position to enjoy your retirement to its fullest.

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