01Risk #1: Living Longer Than Your Money (Longevity Risk)
Longevity risk is the chance that you outlive your savings. It sounds simple, but it’s the hardest retirement risk to plan around, because nobody knows their own expiration date.
Consider a healthy couple retiring at 65. There’s a meaningful chance that at least one of them will live past 90. That’s 25 or more years of income to fund — and if you plan for 20 and live to 95, the last decade is a problem. Plan for 35 to be safe, and you may spend far less than you could have, sacrificing lifestyle to guard against a scenario that never arrives.
02How an Annuity Addresses Longevity Risk
Annuities - and a handful of life insurance policies with income riders - are financial products that can guarantee income for as long as you live, no matter how long that turns out to be. The insurance company takes on the investment and management risk for you.
The most direct tools for this job are income annuities:
- A Single Premium Immediate Annuity (SPIA) converts a lump sum into a guaranteed monthly check that starts right away and continues for life.
- A Deferred Income Annuity (DIA) works the same way but starts payments at a future date you choose — for example, age 80 or 85. Because payments begin later, a relatively small deposit today can produce a substantial income stream in your later years, exactly when other assets may be running low.
Both options can be structured to cover a spouse, and many include features that return remaining value to your beneficiaries if you pass away early. With guaranteed lifetime income in place, the rest of your savings is freed from the job of lasting forever.
03Risk #2: Bad Timing in the Market (Sequence of Returns Risk)
Sequence of returns risk is less familiar, but it can do just as much damage. It’s the risk that the order of your investment returns — not the average — hurts you.
While you’re saving, order doesn’t matter much. A bad year early is followed by years of contributions and recovery. Once you’re withdrawing, the math flips. A bad year early in retirement means you’re selling investments at low prices to fund living expenses, leaving less in the account to recover when the market rebounds. Two retirees can earn the exact same average return and end up in very different places.
04A Tale of Two Retirees
Imagine two people who each retire with $500,000 and withdraw $25,000 at the start of every year. Over five years, both portfolios experience the same annual returns: +15%, +10%, +5%, –10%, and –15%. The only difference is the order.
| Year | Retiree A — good years first | Retiree B — bad years first |
|---|---|---|
| 1 | +15% | –15% |
| 2 | +10% | –10% |
| 3 | +5% | +5% |
| 4 | –10% | +10% |
| 5 | –15% | +15% |
| After 5 years | ≈ $400,000 | ≈ $359,000 |
Same starting balance. Same withdrawals. Same five returns. Retiree B has about $41,000 less — simply because the downturn came early. Stretch this over a full retirement, and the gap between a comfortable outcome and a strained one can come down to timing nobody could have predicted.
This is a simplified hypothetical for illustration only and does not represent any actual product or investment.
05How an Annuity Addresses Sequence of Returns Risk
The way to neutralize sequence risk is to make sure your essential income doesn’t depend on selling investments at a bad time. A Fixed Indexed Annuity (FIA) with a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider is built for exactly this.
Here’s how it works. Your principal is protected from market losses — in a down year, your contract value holds steady rather than declining. Interest is credited based on the performance of a market index, giving you growth potential in good years. And the GLWB rider guarantees a lifetime withdrawal amount that continues even if the contract value is eventually drawn down to zero.
The result is an income source that isn’t derailed by an early bear market. You can leave your other investments alone to recover, because your monthly income was never coming from them in the first place.
06Putting the Two Together
These two risks tend to compound each other. An early market drop shrinks your portfolio, and a long life gives that smaller portfolio more years to cover. An annuity addresses both at once: guaranteed income you cannot outlive, delivered in a way that doesn’t depend on what the market does in any given year.
That doesn’t mean every dollar belongs in an annuity. For most people, the right approach is to cover essential expenses with guaranteed income and keep the rest invested for growth and flexibility. The question is how much guaranteed income you want, and which type of annuity fits your timeline.
07Next Steps
Tim at AISC works with multiple carriers to match the right annuity to your situation — whether that’s an immediate income annuity, a deferred income annuity to protect your later years, or an indexed annuity with a lifetime income rider. Schedule a conversation to see what guaranteed income could look like for you.