“Stocks take the stairs up and the elevator down.”
The volatility and risks that the stock market can bring is no secret. A number of different things can trigger a rapidly declining stock market, from negative economic news and political turmoil to world events and misinformation.
Market risk may not mean as much to someone younger and regularly contributing to their retirement account. A declining stock market can even be an opportunity to contribute more money at lower stock prices. However, as someone nears retirement, this presents a certain amount of risk to a pre-retiree’s portfolio.
Years of stock market gains can be quickly wiped out with losses that can take years to recover from.
For example, if you have $1 million and suffer a 50% loss, your account would be down to $500,000. It would take a 100% gain on this amount just to get back to $1 million. Anytime you have a loss in your account, it takes a greater percentage gain to get back to where you were.
The beginning of the new millennium saw three consecutive years of loss followed by five years of positive gains, then a 37% decline in 2008. A number of investors lost over 50% of their investment portfolios in the market from the fall of 2007 to the spring of 2009, taking them years to recover from the losses.
If a person is retired and needs to withdraw money from this account for living expenses or required minimum distributions, they could be at risk of running out of money. In order to have a more stable portfolio for retirement, they might want to consider branching out from the traditional investment vehicles.
Fixed index annuities can be a solution.
While there are different types of annuities, many people use fixed index annuities for part of their investment portfolios. Some of these will give you a percentage of market gains without the downside. Imagine being able to earn 4%, 8%, or even more, in some cases, during strong market years without the anxiety of losing your gains in down years.
Some of these annuity indices are based on the S&P 500 or other stock indices, while others are linked to other markets, such as bonds. The insurance company that offers the fixed index annuity isn’t actually putting any of your money at risk in the stock market. Through options and other investments, they are able to offer you some of the upside of the market without the downside risk.
While fixed index annuities aren’t designed to outperform the stock market, there can be periods of time when investors make greater gains with annuities, which was the case from 2000 to 2009, the “lost decade of wealth.” Someone with $1 million invested in stocks at the start of 2000 likely had about the same amount, or even less, 10 years later.
A variable annuity will likely still have your money at risk in the market and can suffer losses during market downturns. If you are looking for safer potential growth of your money with no risk of market losses, then it’s best that you avoid a variable annuity.
History can repeat itself.
If there’s anything we have learned from market history, it’s that periods of strong positive stock market gains are often followed by declines. The stock market has crashed a number of times in the past and will likely continue to do so.
Stocks and bonds can have a place in your portfolio; just be sure that you have a plan in place so that not all of your money is at risk of loss in times of market downturns. Many investors feel that the stock market could have a big downturn since it’s currently around all-time-high levels.
Rising interest rates can mean bond values could be declining. If you have a goal of earning more than you would from savings, but without the risks of the stock market, then a fixed indexed annuity could be a place to have some of your investment dollars. Being able to potentially earn 4-8%, or even more, but without the risk of loss, can be attractive.
Over the past century, the stock market has been down 30 years, with some consecutive down years. This can be important to plan and prepare for. The way you invest in your 50s, 60s, and 70s is likely different than how you invested 20 years ago.
Fixed index annuities can be flexible.
Fixed index annuities offer many attractive options that might not have been previously available: Some have no fees, while many offer yearly liquidity with access to your money and can even be set up for a residual lifetime income for you and your spouse either now or in the future. Perhaps you don’t need income but simply want the opportunity for your money to grow without the risk of market losses. FIAs can also offer a way to offset future inflation and rising medical costs.
You don’t have to participate in the next major stock market downturn — losing money in the stock market is optional since you determine how much of your hard-earned money you really want to risk. Your retirement dollars can grow with a fixed index annuity that meets your important financial goals.
Retirement should be about having fun with your family and friends and doing things that you enjoy, which can be difficult if you are worried about losses in your investment accounts. Consider your different options and the things that are important to you and take positive action to help ensure you have the kind of future that you have imagined. Working with a qualified financial professional who offers multiple annuity and investment options can help sort out your financial planning needs.
Investment advisory services offered through Retirement Wealth Advisors Inc. (RWA), a Registered Investment Advisor. Riedmiller Wealth Management and RWA are not affiliated. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.
Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any references to protection benefits or lifetime income generally refer to fixed insurance products. They do not refer, in any way, to securities or investment advisory products or services. Fixed insurance and annuity product guarantees are subject to the claims‐paying ability of the issuing company and not offered by Retirement Wealth Advisors Inc.
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