Retirement outlook survey finds investors favor asset protection over growth

One of the most significant insights from the survey is that 61% of respondents prioritize protecting their assets over growing them. Despite the market rebound in 2023, only 54% of investors believe they are adequately protected from a market downturn. This cautious approach is likely a response to the substantial losses experienced during the 2022 market downturn, when the S&P 500 fell by more than 18%.

Creating a retirement income plan that provides income for life is a top priority for 65% of the survey respondents. This focus on reliable income streams underscores the importance of stability for those nearing or in retirement. Additionally, 48% of respondents ranked protecting assets from loss as one of their primary investing goals, even in a recovering market.

The Global Atlantic survey reveals that 81% of investors value strategies that protect investments while allowing for growth by limiting downside risk. Financial professionals have been proactive in addressing these concerns, with 69% of respondents indicating that their advisors have offered strategies to insulate them from investment losses. Notably, nearly half (47%) of respondents discussed annuities with their financial professionals in the past year, and of those, 30% purchased a new annuity, while almost 22% allocated more to an existing annuity.

To provide additional understanding, let's delve into various strategies for limiting downside risk in more detail.

Diversification is a fundamental risk management strategy that involves spreading investments across different asset classes, sectors and geographical regions. By doing so, investors can reduce the impact of individual security or sector-specific risks. A well-diversified portfolio minimizes the correlation between investments, providing a cushion during market downturns. For example, combining stocks, bonds, real estate and commodities can help balance the portfolio's risk and reward profile. This approach reduces unsystematic risk, which is the risk associated with investing in a particular company or sector.

Asset allocation involves strategically distributing investments across various asset classes to balance risk and reward. By allocating assets among equities, fixed income, real estate and alternative investments, financial professionals can position clients' portfolios to weather market volatility while still capturing growth opportunities. Effective asset allocation ensures that the portfolio remains resilient in different market conditions. For instance, during a market downturn, bonds and other fixed-income assets may perform better than equities, providing stability to the overall portfolio.

Put options are financial derivatives that provide downside protection by allowing investors to sell a security at a predetermined price, regardless of the market price. This strategy is particularly useful for protecting unrealized gains. For example, if an investor owns a stock that has appreciated significantly, they can purchase a put option to lock in the current value. If the stock price falls, the put option increases in value, offsetting the losses. Investors can also use long-term equity anticipation securities (LEAPS) for extended protection periods.

Stop-loss orders are a practical tool for limiting potential losses. By setting a predetermined price level at which a security should be sold, investors can automatically trigger the sale if the market price falls to that level. This strategy helps prevent significant losses by ensuring that investments are sold before they decline further. For example, if an investor sets a stop-loss order at 10% below the purchase price, the security will be sold if it drops by 10%, thereby limiting the downside risk.

Hedging involves using financial instruments, such as options and futures, to offset potential losses in a portfolio. For instance, purchasing put options can provide downside protection by allowing advisors to sell a security at a predetermined price, regardless of the prevailing market price. Hedging strategies offer a layer of protection during market downturns. Another example is shorting closely related securities or purchasing assets that are negatively correlated to the ones being hedged. This approach can mitigate losses when the primary investment declines.

Investing in dividend-paying stocks is a proven method for delivering above-average returns and providing a cushion during market downturns. Dividends account for a significant portion of a stock's total return and can offer a steady income stream. Companies that pay generous dividends tend to grow earnings faster, leading to higher share prices and capital gains. Additionally, dividends provide a hedge against inflation, making them a valuable component of a risk-averse portfolio. Investing in dividend aristocrats — companies that have increased their dividends for at least 25 consecutive years — can ensure a reliable income stream even during volatile market periods.

Principal-protected notes are fixed-income vehicles that safeguard the principal investment while allowing for potential growth. These notes guarantee the return of the initial investment at maturity, regardless of market performance. This strategy is particularly appealing to conservative investors who prioritize capital preservation. Principal-protected notes can be linked to various underlying assets, such as equities or commodities, providing exposure to growth opportunities while minimizing downside risk.

Dynamic asset allocation involves actively adjusting the portfolio's asset allocation based on changing market conditions. Advisors can use quantitative models, technical indicators or economic signals to guide their asset allocation decisions. By dynamically reallocating assets in response to market trends, advisors can proactively manage risk and potentially enhance returns. This approach allows for greater flexibility and responsiveness to market volatility, ensuring that the portfolio remains aligned with the investor's risk tolerance and financial goals.

Annuities are insurance products designed to provide a steady income stream, making them a popular choice for retirement planning due to their potential for downside protection. By ensuring a reliable income regardless of market conditions, annuities can help retirees manage financial risks and achieve greater peace of mind. There are various types of annuities, each with its own features and levels of risk and protection.

• Fixed annuities. A fixed annuity offers a guaranteed interest rate for a specified period, providing a predictable income stream. The insurer assumes the investment risk, ensuring that the annuity holder receives regular payments regardless of market fluctuations. This makes fixed annuities an attractive option for conservative investors who prioritize capital preservation and stable returns. The guaranteed interest rate is typically higher than what is available from traditional savings accounts or certificates of deposit (CDs), making fixed annuities a compelling choice for those seeking a safe and reliable investment.
• Indexed annuities. An indexed annuity combines features of both fixed and variable annuities, offering growth potential linked to a market index (such as the S&P 500) while protecting against losses. The annuity holder's returns are based on the performance of the chosen index, but with a cap on the maximum return and a floor that prevents negative returns. This means that even if the market index performs poorly, the annuity holder's principal is protected, and they will not lose money. Indexed annuities provide a balance between growth potential and downside protection, making them an appealing option for investors seeking moderate risk with some level of security.
• Variable annuities. A variable annuity differs from a fixed annuity in that it offers the potential for higher returns based on the performance of underlying investments, such as mutual funds. While this provides an opportunity for growth, it also introduces downside risk. The value of a variable annuity can fluctuate with market conditions, meaning that the annuity holder could experience losses if the underlying investments perform poorly. However, many variable annuities offer optional riders, such as guaranteed minimum income benefits (GMIB) or guaranteed minimum withdrawal benefits (GMWB), which can provide some level of protection against market downturns. These riders typically come at an additional cost but can help mitigate the risk of outliving one's savings.

One of the primary benefits of annuities is the guaranteed income stream they provide. This ensures that retirees receive regular payments for a specified period or for life, regardless of market conditions. This feature is particularly valuable during periods of market volatility or economic uncertainty, as it provides a stable source of income.

Fixed and indexed annuities also offer principal protection, meaning that the initial investment is safeguarded against market losses. This is especially important for retirees who cannot afford to lose their principal and need to preserve their capital for future income needs.

Many annuities offer optional riders that provide additional protection and benefits. For example, guaranteed minimum income benefits (GMIB) and guaranteed minimum withdrawal benefits (GMWB) can ensure a minimum level of income or withdrawals, even if the underlying investments perform poorly. These riders can help mitigate the downside risk associated with variable annuities.

Annuities offer tax-deferred growth, meaning that the investment earnings are not taxed until they are withdrawn. This allows the investment to grow more quickly, as the earnings can be reinvested without being reduced by taxes. The tax-deferred growth can help offset the impact of market downturns and provide a larger income stream in retirement.

Annuities also help mitigate longevity risk, which is the risk of outliving one's savings. By providing a guaranteed income stream for life, annuities ensure that retirees have a steady source of income, regardless of how long they live. This can provide peace of mind and financial security, especially for those concerned about outliving their assets.

While annuities offer significant benefits, it is essential to consider the associated costs and potential downsides. Annuities often come with fees and charges, such as administrative fees, mortality and expense risk charges, and fees for optional riders. These costs can reduce the overall returns and should be carefully evaluated before purchasing an annuity.

Additionally, the liquidity of annuities can be limited, as they often come with surrender charges for early withdrawals. It is crucial to understand the terms and conditions of the annuity contract and ensure that the purchase aligns with one's financial goals and needs.

Protecting investments while allowing for growth is a critical concern for many investors, especially those nearing or in retirement. The strategies outlined above — diversification, asset allocation, put options, stop-loss orders, hedging, dividend-paying stocks, principal-protected notes, dynamic asset allocation and annuities — provide various methods to limit downside risk and safeguard capital. By employing these strategies, investors can achieve a balanced approach to risk management, ensuring that their portfolios remain resilient in the face of market volatility. Financial professionals play a vital role in guiding clients through these strategies, helping them navigate economic uncertainties and achieve their long-term financial goals.