The market is dangerous. It's prone to big swings in both directions. A bear market at the wrong time can devastate your retirement income potential. In this article, we explain the reality of stock market risk. Then we discuss how you can protect your retirement income against market losses — and still participate when the stock market does well.
On Feb. 12, 2020, the stock market set an all-time high of 29,551. That had people feeling very good about their portfolios. But smart consumers always know the party can end at any time. After all, the market is at its most dangerous precisely when it's at its highest.
Markets have crashed many times before, and the latest market nosedive happened just a few weeks after hitting its peak, ending the longest bull run in market history as the COVID-19 pandemic took hold.
As recently as 2018, the S&P 500 dropped 19.8% off its high. That was scary for people who didn't protect themselves. Fortunately, it recovered quickly that time. But it's not always so.
"The fastest way to wreck a retirement portfolio is to be forced to sell shares in a bear market for income."
A bear market is defined as a market decline of 20% or more. Since 1929, U.S. investors have endured at least 26 of them. And they've experienced "corrections" of 10% or more. There will be more in the future. Nobody knows when.
In the long run, the U.S. stock market has historically been an amazing wealth-building tool. But in the short run, it's always a gamble. Theoretically, it's great to stay invested. But realistically, in the short run, people need to take money out to live on. Especially those in or near retirement.
The fastest way to wreck a retirement portfolio is to be forced to sell shares in a bear market for income. That's what farmers call "eating your seedcorn."
More and more people are learning the lessons of past bear markets: Individuals and families cannot afford to lose the stock market gamble. Once you get within a few years of retirement, it's time to take your money out of the casino.
"Nobody should be taking on risks they can't afford to lose. That's not strategy. It's gambling."
People in or near retirement shouldn't be taking on a lot of direct market risk. So you're right to be looking for ways to reduce exposure to the stock market. Nobody should be taking on risks they can't afford to lose. That's not strategy. It's gambling.
However, folks still want to be able to benefit from any further gains.
What if there were a way to "lock in" your current nest egg: No market losses, guaranteed — and still be able to participate in the strong economy?
The goal is to protect your entire portfolio — or as much of it as you like — against market losses.
A fixed index annuity can do something your broker can't — no matter what happens on Wall Street. It can provide you with a floor against persistent down markets and allow you to share in the gains when the market rises.
During a growing economy, a fixed index annuity can help people benefit as U.S. companies prosper while insuring their money against stock market losses.
If you've done well with saving and investing over the years, it's time to protect it. That's what the insurance industry is for. Individuals can't absorb big stock market risks. But the insurance industry can. In fact, absorbing risk and protecting customers is the whole reason the industry exists.
That's why people use annuities: They're simply insurance contracts guaranteeing a minimum return, a minimum income, or both — regardless of what the market does.
The fixed index annuity is an increasingly popular tool. It's specifically designed to lock in gains, while still allowing the owner to benefit when the market does well. When stocks go up, you make more money. And those gains are locked in. Once they're in, they're in, no matter what the market does.
Regardless of a bear market of 20% or more or a small dip, your account value will remain whole with zero losses.
It's like a ratchet — your money only goes up when the market goes up and doesn't go down when the market goes down.
It's not the right tool for everybody. But it's something to consider if you meet these criteria:
Fixed index annuities have the following advantages:
There are always other considerations, of course. With fixed index annuities, there are some key factors to understand:
It is important to fully understand how the contract works — particularly how returns are calculated and credited, and how surrender charges and early withdrawal charges work.
These contracts aren't designed to generate huge equity-like returns; they're designed to protect you when markets drop. They'll generally do better than CDs and money markets over the long run. But possibly not in any particular year, and not as well as the market when it's going up.
Like any financial instrument, fixed-index annuities have some disadvantages as well. Here are some disadvantages you should be aware of:
Fixed index annuities, like all annuity or insurance products, are not FDIC insured. The contract is backed by the claims-paying ability of the issuing insurance carrier. So it's important to pick a financially stable and highly rated insurance company.
An Alliance America financial advisor can assist you in maximizing your retirement resources and help achieve your retirement goals. Alliance America's planning process is focused on personalized retirement income planning. As fiduciaries, our advisors are required to act in your best interest, and we are dedicated to helping you achieve the retirement lifestyle you seek. You can request a no-obligation consultation by calling 888-864-2542 today.