Say Goodbye to Stock Market Stress – Why Annuities Offer More Peace of Mind

Is stock market volatility keeping you up at night? If all your savings are invested in the market – and if you’re going to need those savings in the near future – the regular ups and downs of the stock market can feel like a roller coaster ride. Annuities offer an alternative for retirees who want peace of mind and guaranteed retirement income.

Stock Market Volatility Has Retirees on Edge

In the long term, the stock market tends to provide positive returns. According to Investopedia, the S&P 500 has produced positive returns for investors over most 20-year periods. However, positive returns are not guaranteed for every investor. Individual stocks may underperform, and temporary sharp market declines can cause portfolios to plummet in value.

According to Bankrate, the Dow reached an all-time high in September 1929. Then the stock market crashed, and the Dow didn’t fully recover until November 1954. The market has experienced other declines since then, notably on October 19, 1987, and March 16, 2020.

If you don’t need your money anytime soon, you can simply ride out the dips and wait for the market to rebound. For people approaching retirement or who are already retired, that’s not always an option. Kiplinger warns that retirees won’t have time to recover from a market downturn of 50%, 40% or even 30%, while 24/7 Wall St. warns that U.S. retirees may be facing larger losses by keeping stock-heavy portfolios amid rising market volatility.

Yahoo Finance says some people are afraid to check their retirement savings due to market turmoil. But keeping your head in the sand won’t protect you from losses. To protect your nest egg, you need retirement strategies that provide a hedge against market volatility. An annuity is one option, and it provides a more predictable alternative to stocks.

Annuities vs. Stocks

Annuities and stocks are both tools used in retirement planning, but they differ in key ways.

• A stock represents a share of ownership in a company. When you buy a company’s stocks, you’re buying a small fraction of its value. If the company performs well, you can receive a nice return on your investment. If the company performs poorly, your investment can lose value. Some stocks provide dividends, which are shares of profits paid to shareholders, although dividends are not typically guaranteed. There are different ways to invest in stocks, but for the purposes of retirement planning, many people hold 401(k) plans or other retirement accounts that invest contributions in funds like stocks and bonds. Retirees can make withdrawals to obtain retirement income, but they may run out of money if the market crashes or if they withdraw too much.
• An annuity is a contract between the annuity owner and the insurance company that provides the annuity. The annuity owner pays a premium and then receives a stream of payments. How this works exactly will depend on the type of annuity, but it’s possible to receive guaranteed lifetime income through an annuity.

Are Annuities Tied to the Stock Market?

Annuities can provide relief from stock market volatility. However, it’s important to know whether you have a variable annuity or a fixed annuity.

• Variable annuities grow at a variable crediting rate that’s tied to underlying investments. Although these annuities have a potential for larger returns, they also come with risk. If the market underperforms, your annuity could lose value, and you’ll have less retirement income as a result.
• Fixed annuities grow at a minimum guaranteed crediting rate. In the case of fixed indexed annuities, you will receive the minimum crediting rate, but you may receive a higher crediting rate if the market performs well. With other fixed annuities, the crediting rate is set in the contract and will not go up or down regardless of what the market does. For retirees who are worried about market volatility, this can provide peace of mind.

If you want a source of retirement income that’s completely divorced from the whims of the market, go for a fixed annuity.

Are Annuities Better Than Stocks?

Whether annuities are better than stocks depends on your goals.

• If you’re in your 20s or 30s and looking for a long-term investment that’s likely to produce good returns over a period of decades, stocks are a fantastic option. A market crash could cause the value of your stocks to plummet, but as long as you resist panic selling, history has shown that stock market recovery will most likely happen eventually. The same cannot be said for individual stocks – some may lose value and never recover. However, a diversified portfolio provides protection against this risk.
• If you’re retired or getting ready to retire, annuities may be a better fit. An annuity can provide guaranteed retirement income. This is not true of all annuities – some annuities only provide payments for a fixed number of years, and some annuities have variable crediting rates that could result in lost value during market declines. However, if you select a fixed annuity that provides guaranteed lifetime payouts, you can rest easy knowing that you’ll continue receiving a stable income through the ups and downs of the market.

It's important to note that you don’t necessarily have to choose between stocks or annuities. It’s possible to have both.

If all of your retirement savings is tied up in a stock-based retirement plan and you’re worried about market turmoil, you can choose to roll over some of your funds into an annuity. It doesn’t need to be all or nothing. How much you roll over will depend on your risk appetite, as well as where you are in your retirement.

For example, someone in their early 60s may want to balance a short-term need for guaranteed income with a long-term need for a maximum return, while someone in their late 80s or 90s may be more focused on guaranteed income now, with no tolerance for market volatility.

If the Market Crashes, Will Your Retirement Be Secure?

A retirement strategy that relies too heavily on stocks can leave you vulnerable to the fluctuations of the market. Volatility may not be a problem when retirement is still decades away and you can just wait things out, but it can become stressful when you need money in the near future. Annuities provide an alternative to stock-based retirement strategies. If you have a fixed annuity, you will receive your guaranteed payments even if the market crashes.

If you’re losing sleep over market turmoil, it’s time to take action to secure your retirement income.

Ask yourself:

• Do you have retirement savings that you’d like to protect from market turmoil?
• Do you need guaranteed retirement income?

If the answer to these questions is yes, an annuity could be the retirement solution you need to secure retirement income and peace of mind.

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