Eliminating Sequence of Returns Risk in Retirement

How a Fixed Indexed Anuity with an Income Rider Can Protect IRA RMDs

One of the greatest hidden risks in retirement planning is sequence of returns risk. This risk becomes especially dangerous when retirees are required to take Required Minimum Distributions (RMDs) from their IRAs.

Let’s break down the problem — and how a properly structured Fixed Indexed Anuity (FIA) with an Income Rider inside an IRA can mitigate it.

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What Is Sequence of Returns Risk?

Sequence risk refers to the order in which market returns occur during retirement.

When you are accumulating assets, market downturns can recover over time.
When you are withdrawing assets, market downturns combined with distributions can permanently impair your portfolio.

Example:

• Retiree begins taking RMDs at age 73.

• Market declines 20% in year one.

• RMD must still be taken.

• Withdrawal locks in losses.

• Reduced principal now has less capital to recover.

This creates a compounding negative effect that can significantly shorten portfolio longevity.

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The Problem With Traditional Market-Based IRAs

If your IRA is invested in:

• Mutual funds

• Managed accounts

• Variable annuities

You are exposed to:

1. Market volatility

2. Mandatory withdrawals

3. Permanent impairment risk during downturns

When the IRS requires a distribution, it does not matter whether the market is up or down — the withdrawal must occur.

That is where structure matters.

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How a Fixed Indexed Anuity (FIA) with Income Rider Solves the RMD Problem

A Fixed Indexed Anuity (FIA) is an insurance product designed to provide:

• Principal protection from market loss

• Growth linked to an external index (e.g., S&P 500)

• No direct market participation

• No downside market risk

When paired with an income rider, it can provide:

• A guaranteed lifetime income stream

• A protected income base that grows regardless of market downturns

• Predictable income for RMD planning

Key Advantage in an IRA:

When structured correctly, the guaranteed income payment can satisfy the RMD requirement.

Even if the index has a negative year:

• Your principal is not reduced due to market loss.

• Your income rider continues to provide the contractual payout.

• You avoid selling depreciated assets to meet RMD obligations.

This effectively neutralizes sequence of returns risk for the income portion of the IRA.

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How It Works in Practice

1. Client transfers IRA funds into FIA.

2. Income rider establishes a guaranteed income base.

3. At RMD age, income payments begin.

4. Income payments satisfy IRS RMD requirements.

5. Market downturn does not reduce principal due to negative returns.

Result:
You are no longer forced to sell market-exposed assets at a loss to meet IRS distribution rules.

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Variable Annuity vs. Fixed Indexed Anuity

Understanding the distinction is critical.

Variable Annuity (VA)

A variable annuity:

• Invests directly in subaccounts (similar to mutual funds)

• Exposes principal to market risk

• Can lose value, including original basis

• Typically includes:

  • Mortality & expense (M&E) charges

  • Administrative fees

  • Underlying fund expense ratios

  • Rider fees (if income riders added)

Key Risk:
In a severe market downturn, a variable annuity owner can lose principal while still being required to take RMDs. Losses are real, not buffered.

Even with income riders, the account value can be depleted if markets perform poorly and withdrawals continue.

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Fixed Indexed Anuity (FIA)

A fixed indexed annuity:

• Does NOT invest directly in the market

• Credits interest based on index performance

• Has a 0% floor (no market loss due to index decline)

• Does not charge traditional M&E fees

• Income rider fees (if elected) are typically transparent and contractually defined

Key Advantage:
You cannot lose principal due to market performance.

This makes FIAs particularly useful for:

• Conservative IRA allocations

• RMD planning

• Income-focused retirement strategies

• Clients concerned about downside protection

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Why This Matters More Today

With:

• Longer life expectancy

• Increased market volatility

• Mandatory RMD age starting at 73

• Rising interest rate cycles

Protecting retirement income is more important than chasing returns.

Retirement planning is no longer about maximizing growth.
It is about protecting distribution sustainability.

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Strategic Use Case

A prudent strategy many retirees consider:

• Keep growth assets in equities.

• Allocate a portion of IRA assets to an FIA with income rider.

• Use guaranteed income to satisfy RMDs.

• Reduce exposure to forced selling during downturns.

This creates balance:

Growth + Protection + Predictable Income

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Final Thought

Sequence risk is not theoretical. It is mathematical.

When withdrawals intersect with volatility, the damage can be irreversible.

A Fixed Indexed Anuity with an income rider, structured properly inside an IRA, can:

• Eliminate market loss on protected assets

• Provide predictable income

• Satisfy RMD requirements

• Reduce sequence of returns risk

If you would like an analysis showing how this could apply to your retirement portfolio, we can run a personalized illustration.

Retirement income planning should be deliberate — not left to chance.

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