How fixed index annuities help lower sequence of returns risk in retirement

One of the key risks in retirement is sequence of returns risk, which can significantly impact how long your savings may last. Experiencing market downturns early in retirement can have a lasting impact on investments that are directly exposed to market performance because withdrawals taken during down markets may reduce the amount left to recover when markets improve. That’s why including solutions that can help manage market volatility, like a fixed index annuity, can play a valuable role in a retirement income strategy.

For individuals approaching or entering retirement, this risk can be especially important. Retirement planning is not only about saving for retirement. It is also about creating a strategy for how those savings may be used once income begins. When withdrawals, market volatility, and timing all come together, the order of returns, both gains and losses, can make a meaningful difference in long-term retirement outcomes.

What is a sequence of returns and why does it matter?

A sequence of returns describes the order market-based investments gain or lose value, especially as a person approaches and enters retirement. While two market-based portfolios may earn similar returns over the long run, the one that experiences losses, especially early in retirement, may face a very different outcome. This is because withdrawals taken during down markets can lock in some losses and reduce the amount of money left to recover when markets improve.

Sequence of returns risk, often called sequence risk, is an important concept to understand in retirement planning. Experiencing negative returns in the early years of retirement when you may be relying on your savings for income can have a lasting impact on how long those assets may last. With less time to recover from market downturns, early losses can place added pressure on a portfolio, even if long-term returns eventually average out. In other words, the timing of market performance can matter just as much as the performance itself. A retirement strategy that looks strong based on long-term averages may still face challenges if losses happen early and withdrawals continue during those down years.

Let’s explore a hypothetical example of market sequence of returns risk.

In the chart, market returns affect both growth and the ability to recover after a downturn. Scenario A begins taking withdrawals in 2003, and scenario B begins taking withdrawals just two years later in 2005. Both have $500,000 at the time withdrawals begin. Although both scenarios begin with the same amount, they experience different gains and losses once withdrawals start.

This is where sequence risk becomes important. Gains and losses in the first several years of retirement can affect how much remains invested for future growth. Twenty years later, even with only a two-year difference in when withdrawals began, scenario A still has over $200,000, while scenario B’s account is depleted by year 16.

For those looking to help mitigate this risk, a fixed index annuity, or FIA, might be an option. A fixed index annuity is designed to protect premium from market-based losses, which can reduce the need to recover from down years.

Why timing can matter as much as the average rate of return on an annuity

When evaluating retirement options, it’s helpful to look beyond the average rate of return and consider how timing can impact your income. Focusing only on the average rate of return on an annuity, or on any retirement asset, may not provide the full picture of how income could be affected over time. The average market return doesn’t reflect when gains or losses happen, which means it may overlook the effects of sequence risk, especially during the early years of retirement when withdrawals begin.

While some market-based investments may offer higher average returns, they can also come with more risk and uncertainty. In contrast, fixed index annuities are often utilized for their lower risk and generally more predictable outcomes, which can help reduce the chances of having a gap between income and expenses and provide greater confidence in maintaining income throughout retirement.

Depending on the type of annuity and the features selected, the annuity rate of return may be only one factor to consider. Protection, income guarantees, surrender charges, fees, liquidity needs, and overall retirement goals can also play an important role in determining whether a particular annuity fits within a broader retirement income strategy.

Are fixed index annuities tied to the stock market?

Fixed index annuities are not directly invested in the market but may credit interest based on the performance of a market-based index, offering growth potential while helping protect the premium from market volatility. Because of this balance, FIAs may be an option for those looking to grow retirement income potential, but want to stay toward the lower end of the risk spectrum. This distinction can be helpful for people who want some opportunity for interest credits tied to index performance, but who are also concerned about protecting retirement savings from direct market losses.

How a fixed index annuity helps reduce risk in retirement

While one can’t predict what the market will do, an FIA can offer a balance of protection from market downturns and growth potential. Interest is credited based in part on the performance of specific indices without the risk of loss of premium due to market downturns. For retirees taking income, that protection can matter because it may help reduce the impact of market declines during years when withdrawals are also being made. Since the premium is not invested directly in the market, the interest credited will never be less than zero, even when there are fluctuations.

FIAs can also help address concerns of depleting retirement savings through product features that support long-term income, such as:

Annual resets help protect against market downturns

An annual reset feature of many fixed index annuities helps address sequence of returns risk by locking in interest credits, meaning premium cannot be lost due to market decreases. The “annual” reset applies to credit terms that span one year, while longer terms reset at the end of their stated period. By establishing a new starting point after each term, FIAs can help reduce the impact of negative market performance while preserving opportunities for future interest credits. This approach supports both growth potential and protection of retirement savings over time.

Lifetime income promotes financial confidence

Many fixed index annuities are designed to provide guaranteed lifetime income while helping manage risks in retirement. FIAs generally fall at the lower end of the risk spectrum, as premiums are protected from market downturns. Because of this balance of protection and growth potential, FIAs can complement a wide range of retirement portfolios, including those with higher exposure to market risk, by helping protect from market volatility while still offering the opportunity to grow savings for the future.

For individuals concerned about outliving their savings, lifetime income features may help create a more reliable income stream that can continue regardless of how long retirement lasts, subject to the terms of the contract. This can be especially meaningful when paired with other retirement assets, since guaranteed income can help cover ongoing needs while other parts of a portfolio may remain positioned for different goals.

Fixed index annuities from Midland National can help support retirement income planning

Planning for retirement is about more than saving, it’s also about creating a strategy that helps turn those savings into reliable income. Midland National offers a range of annuity solutions designed to support long-term goals while helping manage market risk and provide income, guaranteed by the issuer. Whether you’re building your retirement foundation or looking to strengthen your existing plan, these solutions may play a valuable role in preparing for the road ahead.

A fixed index annuity may be one way to help manage sequence of returns risk while supporting a broader retirement income strategy. Explore your options by connecting with a Midland National agent to learn how a personalized strategy may support your retirement income goals.

Fixed index annuities are not a direct investment in the stock market. They are long term insurance products with guarantees backed by the issuing company. They provide the potential for interest to be credited based in part on the performance of specific indices, without the risk of loss of premium due to market downturns or fluctuation. Although fixed index annuities guarantee no loss of premium due to market downturns, deductions from the accumulation value for optional benefit riders or strategy fees or charges associated with allocations to enhanced crediting methods could exceed interest credited to the accumulation value, which would result in loss of premium. They may not be appropriate for all clients. Interest credits to a fixed index annuity will not mirror the actual performance of the relevant index.

This information is provided for general reference purposes and should not be viewed as investment advice or as a recommendation for a specific allocation. Neither Midland National, nor any agents acting on its behalf should be viewed as providing legal, tax or investment advice. Always consult with and rely on a qualified advisor.

Hypothetical examples and illustrations are for illustrative and educational purposes only and not intended to predict future performance. The use of alternate assumptions could produce significantly different results.

The “S&P 500®” (“the Index”) is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and has been licensed for use by Midland National® Life Insurance Company (“the Company”). S&P®, S&P 500®, US 500, The 500, iBoxx®, iTraxx® and CDX® are trademarks of S&P Global, Inc. or its affiliates (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The Company’s Products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Indices.

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