Are Annuities Safe in a Recession?

Yes, some annuities are safe in a recession. Some annuities are even securities. Fixed annuities provide guaranteed rates of return, which means that you know exactly how much you can earn at the end of the term. Annuities that are tied to the stock market, like variable annuities and fixed indexed annuities, are not as safe during a recession.

Now is a good time to be thinking about how to take care of your money during a recession because one could be coming. In a survey by the Financial Times, 68% of economists predicted a recession in 2023. Recessions are a normal part of the economic cycle—they happen regularly.

Making a retirement plan is complicated at the best of times, and big changes in the economy can make planning harder and more unpredictable. A recession could put some of your sources of retirement income in jeopardy.

In this article, you’ll learn which types of annuities can help you plan for the future and build retirement savings, even during a recession.

Annuities Steadily Grow Your Money in a Recession

Annuity contracts are insurance products that you buy from a life insurance company. You buy an annuity by paying a premium into your annuity account. This starts the accumulation phase, which is when your money earns interest and grows.

Later, you can choose to annuitize and start the payout phase. When you do this, you convert your annuity account into a steady stream of income. You also choose between a number of payout options, which determine whether your annuity income is paid out over a certain period or for the rest of your life.

How much money you earn during the accumulation phase depends on which type of annuity you have and your crediting rate. Each type of annuity determines your interest crediting rate differently.

The first main type is called a fixed annuity. Fixed annuity rates have a guaranteed minimum rate of return, meaning that the interest rate will never drop below that rate during your initial contract term. For example, at the time of this writing, Canvas Annuity is offering our Future Fund fixed annuity at 4.60% (see our current annuity product rates here). This guaranteed fixed minimum rate means that you can calculate how much you will earn at the end of the contract term.

The second main type of annuity is the variable annuity. In a variable annuity, you choose sub-accounts into which your premiums are placed. Each sub-account is associated with a set of investments with different risk profiles. The interest rate that your annuity earns then varies with the performance of the investments that make up the sub-accounts. If they perform well, your annuity interest crediting rate goes up, but if they perform poorly, your rate could be quite low. You could even lose money.

The third main type of annuity is the fixed-indexed annuity. This type is like a blend of the first two. These offer a fixed minimum interest rate, often 0% or 1%, but you also choose a market index to follow. Your interest rate is tied to that index — as the securities or investments that make up that index increase, so does your rate. If they decrease, so does your rate (although it will never fall below the fixed minimum).

Note that these three types of annuities are deferred annuities. They’re deferred because your money has time to grow and accumulate before you begin to receive your withdrawals. You can also opt for an immediate annuity. An immediate annuity skips the accumulation phase and begins to pay you back soon after you buy it.

Different Annuities Have Different Risks in a Recession

A recession is a contraction of an economy. It happens when the level of overall production falls over a period of time. Recessions are typically moments of significant volatility and uncertainty. They often generate unemployment, reduced family income, and cause some companies to become insolvent. Typically recessions occur after periods of growth, and then the economy rebounds again afterward.

They also tend to reduce investment from individuals, companies, and governments. As individuals, companies, and governments reduce their investments, the price of securities and stocks also tends to fall. While some individual companies may continue to perform well during a recession, the general trend is for stock prices to fall.

That can have an effect on annuities, depending on the type you have.

Variable Annuities in a Recession

As noted above, variable annuity rates are linked to the underlying investments you choose when you buy the annuity. You can choose sub-accounts that are linked to more volatile investment options, like stocks. Or you can choose sub-accounts that are linked to less volatile options, like bonds.

How risky a variable annuity is in a recession depends on the investments that it is linked to. If the sector of the market that an annuity is linked to suffers in a recession, the annuity can perform poorly and even lose money. Stocks typically have more market risk, and so they are more likely to decline during a recession.

Bonds are usually safer because they experience less market volatility. If your variable annuity is tied to bonds, it may not change much, even during a recession.

Variable annuities are the riskiest type of annuity overall. In a recession, it is also the most likely to suffer from significant downturns.

Fixed-Index Annuities in a Recession

Fixed-indexed annuities are also fairly risky during a recession, although less so than variable annuities.

Fixed-indexed annuities provide interest rates that vary along with a market index, such as the Nasdaq or S&P 500. During a recession, as the stock price of most companies falls, these indices tend to go down. That means worse returns for the fixed-indexed annuities that are tied to these indices.

One benefit of fixed-indexed annuities is that they typically offer a “loss floor” or minimum interest rate — usually 0%. That means that the rate of interest you earn won’t go into the negative, and you won’t lose money solely due to poor market performance.

So while a recession may not cause you to lose your fixed-indexed annuity account value, you won’t earn much, either.

Fixed Annuities in a Recession

The fixed annuity is the best annuity to have during a recession because it has a guaranteed fixed interest rate that is stable for the entire term of the annuity.

That guaranteed rate ensures that your money will grow steadily, even in a recession when the stock market is performing poorly. That’s why fixed annuities are one of the safest financial products, regardless of whether there is a market downturn.

Annuities Offer Guaranteed Income in a Recession

There is one last feature of annuities that is relevant to recessions: guaranteed lifetime income distributions.

Regardless of the annuity, most retirees will eventually wish to convert it into a stream of income. The annuity payments can be used to supplement other sources of income, like investment income, pensions, and social security checks.

During a recession, it’s common for individuals to lose income. For example, they may be laid off from work and become unemployed. People may find it hard to sell their houses or fill their rental properties, reducing potential real estate income. Dividend stocks or other sources of investment income may dry up during a recession.

Through that, annuity income payments will stay consistent, regardless of whether the economy is expanding or contracting. If you choose a lifetime payout option for your annuity income, you’ll receive those payments for the rest of your life — even during poor market conditions.

This can be a source of financial security, especially when much of the rest of the economy is uncertain. In that way, the guaranteed lifetime income that annuities offer can also serve as a buffer against the negative impacts of a recession. Knowing that you’ll have monthly payments coming in may give you some peace of mind, even during a recession.

Fixed Annuities Can Help You Feel Financially Secure in a Recession

Recessions can be scary and unpredictable. They can mean that people lose their jobs, that work becomes more scarce, and that the sources of income we typically rely on diminish.

An unpredictable economy makes any financial planning more challenging, but it can be especially destabilizing for those who are close to, or in, retirement.

Annuities can provide a steady income that helps people weather the negative financial effects of a recession.

Fixed annuities can also provide a buffer against the negative financial effects of a recession because they offer guaranteed growth at steady rates. (Variable and fixed indexed annuities are riskier during a recession because their rates of return are tied to market performance, and during a recession, the markets tend to perform poorly.) For those reasons, fixed annuities tend to be an especially good option in the context of an economic recession.

Of course, whether an annuity is right for you depends on your needs and financial circumstances. If you’re not sure, consider speaking with a financial advisor. If you want to take advantage of guaranteed growth and guaranteed lifetime income, consider a fixed annuity from Canvas Annuity.

Apply online here.