Sequence of Returns Risk: Why Retiring at Market Highs Is Tricky

If you're planning to retire in the next year or two, here's something most people don't hear until it's too late: the stock market's recent run to all-time highs is actually something to be careful about — not just celebrate.

It's not that markets are bad. It's about timing. And a little-known concept called sequence of returns risk can make or break your retirement income, even if your long-term average return looks fine on paper.

What Is Sequence of Returns Risk?

Sequence of returns risk is the danger that bad investment years happen early in your retirement — right when you're making withdrawals from your portfolio.

Here's why it matters more than people think. If your portfolio drops 25% in year two of retirement while you're pulling out $40,000 a year to live on, you're selling shares at a loss just to cover expenses. Those shares can never recover for you, because they're gone. The math gets ugly fast.

Two retirees with the exact same average annual return over 20 years can end up in completely different places financially — depending entirely on whether the bad years came at the beginning or the end of retirement. The person who got the bad years first often runs out of money. The other person is fine.

Why 2026 Is a Critical Moment to Think About This

U.S. equity markets hit new highs in mid-2026. That's great news for people still working and accumulating. But if you're within five years of retiring — or already retired — it means your portfolio is likely sitting near its peak value right now.

What goes up can come down. A 20–30% correction early in retirement, while you're drawing income from the same accounts, is exactly the scenario sequence of returns risk describes. And history shows corrections don't announce themselves in advance.

This isn't a prediction that markets will crash. It's a simple observation: the higher markets are when you retire, the more damage a correction can do to your withdrawal rate in those critical first years.

How Retirees Protect Against It

The good news is this risk is manageable — if you plan for it. A few strategies that actually work:

• Separate your income from your investments. If you're not forced to sell stocks during a down year to pay the electric bill, you're protected. This is the core idea behind using a guaranteed income source — like a fixed indexed annuity with an income rider — to cover your fixed monthly expenses. Your FIA income keeps coming regardless of what the S&P 500 does.
• Build a cash or short-term buffer. Some retirees keep 1–2 years of living expenses in cash or a short-term MYGA (multi-year guaranteed annuity). If markets drop, you draw from the buffer and let investments recover before touching them again.
• Don't count on "average" returns. A planner who tells you to expect 7% annually and calls it done is skipping the hard part. The sequence of those returns matters just as much as the average. Make sure your plan stress-tests bad early years, not just the long-term mean.
• Consider a "floor and upside" approach. Cover your non-negotiable expenses with guaranteed income (Social Security + annuity income), then let the rest stay invested for growth. This way, a market drop affects your upside — not your ability to pay the mortgage or utilities.

Where Fixed Indexed Annuities Fit In

A fixed indexed annuity (FIA) with a guaranteed lifetime withdrawal benefit (GLWB) is one of the more practical tools for addressing sequence of returns risk directly. Here's the basic idea:

You put a portion of your retirement savings into an FIA. The insurance company guarantees you a specific income amount each year for life — regardless of market conditions, regardless of how long you live. Your principal is protected from market losses. And if the index performs well, your contract value grows.

That guaranteed income becomes your floor. Your investments in the market can fluctuate, and during a bad year, you simply don't touch them — you live on the guaranteed income instead. That's sequence of returns risk, neutralized.

It's not the right tool for every dollar. But for retirees in Texas and Oklahoma who are asking "how do I make sure I don't run out of money if the market drops right after I retire?" — this is worth understanding thoroughly.

The Bottom Line

Markets near all-time highs feel good. But if you're close to retirement, this is exactly the right time to make sure your income plan can survive a downturn in year one, two, or three. The average return over 30 years won't save you if you're forced to sell at a loss while the market is recovering.

Build your plan around what you need guaranteed, then let the rest grow. That's the durable approach — and it's what separates retirees who sleep well from those who check their accounts every morning with dread.

Want to see how your current plan holds up under a bad early-retirement scenario? I run a simple stress test that shows exactly what happens to your income if markets drop 20% in year one or two of retirement. Book a free 30-minute call at retire360.app/book and we'll look at your numbers together.