Let me walk you through a comparison that I think makes an important point clearer than any chart or graph could.
Two people. Both 65. Both retiring with $500,000 in savings. Same starting line. The difference? How they set up their income.
Retiree A: the full-portfolio approach
Retiree A kept everything in a diversified portfolio and planned to withdraw about 4.5% per year — roughly $22,500 annually. Solid plan on paper.
But then the market dipped 18% in year 3. Retiree A still needed to make withdrawals to cover expenses. Selling during a down market accelerated the decline. By year 12, the portfolio was under $200,000. By year 20, it was a real concern.
This is what's called sequence-of-returns risk. The order in which you experience gains and losses matters enormously when you're taking money out.
Retiree B: the split approach
Retiree B took a different path. He set aside a portion of his savings — about $200,000 — to produce a predictable income stream. That income covered his essential expenses: housing, food, healthcare, utilities.
The remaining $300,000 stayed in a growth-oriented portfolio. When the same market dip happened in year 3, Retiree B didn't need to sell. His essential costs were already covered by his income stream. The portfolio had time to recover.
By year 20, Retiree B still had income coming in AND a portfolio that had benefited from staying invested through the recovery.
Secure your income first, then let the rest work
I call this the "buffer strategy." The idea isn't to move everything into one strategy. It's to create a floor of income that covers your needs, so the rest of your money has the freedom to potentially grow without the pressure of funding your daily life.
Think of it as the "two end goals of money" — your money is either going to be spent by you during your lifetime, or it's going to be passed on to someone you care about. Structuring it that way — income for spending, growth for legacy — tends to produce better outcomes than trying to make one pool do both jobs.
Not every situation calls for this approach. But if you've ever wondered what your own version of the split strategy could look like, it's worth running the numbers.
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Author of Indexed Annuity Secrets and founder of Pacific Ridgeway Insurance Solutions in San Diego. Navy veteran. Licensed financial professional, CA #4132743.
Fixed indexed annuities are insurance products, not investments. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. This article is for educational purposes only and is not financial, investment, tax, or insurance advice.