What to Do When a Market Downturn Threatens the Money You Planned to Live On
Losing money in the stock market is painful at any age, but losses can become much more damaging when you are approaching retirement. If you are 10, 15, or 20 years away from retirement, you may have enough time to wait for the market to recover. If retirement is only a few years away—or you have already retired—you may not have that luxury.
This problem is known as sequence of returns risk. It occurs when significant investment losses happen shortly before or during the early years of retirement, particularly when you also need to withdraw money to pay your bills.
Think about someone preparing to retire during the 2008 financial crisis. Their retirement portfolio may have fallen dramatically just as they were preparing to start taking withdrawals. Selling investments after those losses could permanently reduce the amount of money available to participate in the eventual recovery.
The stock market ultimately recovered, but retirees who needed their money immediately could not necessarily wait years for that recovery.
That is the problem you need to solve.
Consider a Fixed Index Annuity With a Premium Bonus
One option for someone approaching retirement after experiencing market losses is a fixed index annuity with a premium bonus.
A premium bonus is additional value credited by the insurance company when you purchase the annuity. Depending on the contract, the bonus may help offset part of the losses you previously experienced in the stock market.
For example, if you transferred $200,000 into an annuity offering a 10% premium bonus, the contract could initially credit an additional $20,000 according to the annuity’s terms.
However, there is an important catch: an annuity bonus is not free money you can immediately withdraw.
Bonuses generally come with surrender-charge periods, vesting schedules, withdrawal restrictions, or other contractual requirements. If you cancel the annuity early, some or all of the bonus may be forfeited.
The bonus should therefore be evaluated as part of the entire annuity—not as the only reason to purchase one.
Pros
- Can immediately increase the value used for certain contract benefits.
- May help offset previous investment losses.
- Protects contract value from direct stock market losses.
- Future interest can be linked to market indexes without directly investing in those indexes.
- Previously credited interest generally cannot be lost because the stock market declines.
- Can often be combined with guaranteed lifetime income benefits.
Cons
- Bonuses usually come with surrender-charge periods or vesting requirements.
- You generally cannot withdraw the entire account without penalties during the surrender period.
- Index interest is limited by contractual features such as caps, participation rates, or spreads.
- A bonus does not automatically mean the annuity is better than a non-bonus annuity.
- Withdrawals before the contract allows them can reduce benefits.
How a Fixed Index Annuity Protects Against Future Market Losses
A fixed index annuity does not directly invest your money in the stock market.
Instead, the insurance company calculates interest using the performance of an external market index, such as the S&P 500.
If the applicable index strategy produces a positive result, you may receive interest according to the contract’s crediting formula.
If the index declines, you typically receive no indexed interest for that crediting period rather than suffering the corresponding market loss.
For example, suppose the market falls 25%. Someone directly invested in the market could experience a significant decline. A traditional fixed index annuity generally would not lose account value because the index fell 25%. Instead, the indexed strategy could simply credit 0% for that period, keeping your principal protected from market volatility.
If the annuity later credits interest, those earnings become tax-deferred and part of the contract value, remaining protected from future stock market declines.
The tradeoff is that you will not receive the full upside of the stock market. Caps, participation rates, spreads, and other crediting provisions can limit the amount of interest credited.
You are exchanging some upside potential for protection against direct market losses.
Add Guaranteed Lifetime Income
People approaching retirement should not focus exclusively on recovering their account balance. They should also determine whether their remaining savings can reliably generate the income they need.
A fixed index annuity can often include a guaranteed lifetime withdrawal benefit (GLWB).
A GLWB creates a contractual framework for taking retirement income. Instead of deciding how much to withdraw from your investments every year while worrying about market conditions, the insurance company determines a guaranteed lifetime income amount under the rider’s terms.
Depending on the annuity, income may continue for the remainder of your life even if the actual account value eventually falls to zero from permitted lifetime withdrawals.
Some contracts also offer joint lifetime income, meaning payments can continue for the lives of both spouses.
Meanwhile, your annuity may continue earning interest according to its available crediting strategies. If you die while account value remains, that remaining value can generally pass to your named beneficiaries according to the contract.
Pros
- Creates predictable retirement income.
- Reduces dependence on stock market withdrawals.
- Can provide income for life.
- Joint-life options can protect a surviving spouse.
- Remaining account value can generally pass to beneficiaries.
- Helps address longevity risk as well as sequence of returns risk.
Cons
- GLWB riders may charge an annual fee.
- Withdrawals exceeding permitted amounts can reduce guarantees.
- Lifetime income calculations vary substantially among insurance companies.
- Some contracts provide much stronger income guarantees than others.
- The income benefit base used to calculate withdrawals is generally not the same thing as cash value available for withdrawal.
Don’t Chase a Bonus Without Comparing the Income
A large annuity bonus looks attractive after losing money, but the highest bonus does not necessarily produce the best retirement outcome.
Suppose one annuity offers a 20% bonus but eventually guarantees $35,000 of annual lifetime income. Another offers only a 10% bonus but guarantees $42,000 annually.
If your primary goal is retirement income, the second contract may be considerably more valuable despite advertising a smaller bonus.
| Feature | What to Compare |
|---|---|
| Lifetime Income | How much guaranteed annual income the contract actually provides. |
| Starting Age | How income changes depending on when withdrawals begin. |
| Income Growth | Whether income stays level or has the potential to increase. |
| Rider Fees | Annual fees charged for guaranteed income or other benefits. |
| Surrender Period | How long surrender charges apply. |
| Liquidity | How much money you can withdraw without a surrender charge. |
| Index Options | The indexes and crediting strategies available within the contract. |
| Caps and Participation Rates | How much of an index’s positive performance can be credited as interest. |
| Bonus Requirements | Vesting schedules and requirements for keeping the full bonus. |
| Carrier Strength | The financial strength of the insurance company issuing the contract. |
| Spousal Benefits | Whether guaranteed income can continue for a surviving spouse. |
| Death Benefit | What remaining value may pass to beneficiaries. |
The headline bonus should never replace a complete comparison.
Another Option: Wait for the Market to Recover
You do not necessarily need an annuity simply because the stock market declined.
If you have plenty of cash, guaranteed income, and other assets available to pay your expenses, you may be able to leave your investments alone and wait for the market to recover.
Pros
- Maintains full market growth potential.
- Avoids annuity surrender restrictions.
- Keeps investment liquidity.
- May produce greater long-term growth.
Cons
- There is no guarantee regarding when the market will recover.
- Additional losses are possible.
- Taking withdrawals during a downturn can compound portfolio damage.
- Retirees may be forced to reduce spending if their portfolio falls significantly.
This strategy makes considerably more sense when you do not need to sell investments during the downturn.
Keep Several Years of Retirement Spending in Safer Assets
Another strategy is maintaining part of your retirement savings outside the stock market.
This could include cash, high-yield savings accounts, certificates of deposit, Treasury securities, fixed annuities, and multi-year guaranteed annuities (MYGAs).
These assets can provide money for retirement expenses while allowing the stock portion of your portfolio more time to recover.
The downside is that conservative assets generally have lower long-term growth potential than equities.
Comparing Your Options
| Strategy | Market Loss Protection | Growth Potential | Lifetime Income | Liquidity |
|---|---|---|---|---|
| Fixed Index Annuity | Yes, from direct market losses | Moderate | Available with a GLWB | Moderate |
| Remain Invested | No | Higher potential | No contractual guarantee | High |
| MYGA | Yes | Fixed | Not typically the primary purpose | Varies by contract |
| CD | Yes | Fixed | No | Varies |
| Treasury Securities | Not exposed to stock market performance | Fixed if held to maturity | No lifetime guarantee | Generally high, although market value can fluctuate before maturity |
Who May Benefit From This Strategy?
A fixed index annuity with guaranteed income may make sense for people who:
- Are within several years of retirement.
- Have recently experienced significant market losses.
- Cannot afford another major portfolio decline.
- Need predictable retirement income.
- Are worried about running out of money.
- Want to protect a portion of retirement savings from market volatility.
- Want lifetime income without immediately giving up control of the entire account.
- Have enough other liquid assets to handle emergencies.
The closer you are to relying on your savings for monthly income, the more important downside protection becomes.
Who Might Not Benefit?
You may not need an annuity for this purpose if:
- You have decades before retirement.
- You can financially tolerate significant market declines.
- Your pension and Social Security already cover all essential expenses.
- You have sufficient cash reserves to avoid selling investments during downturns.
- Maximum liquidity is more important than guaranteed income.
- You are comfortable accepting market volatility in exchange for higher potential long-term returns.
You do not need to eliminate market risk everywhere. The goal is determining which money cannot afford to experience another major loss.
Other Insurance That Can Protect Your Retirement Plan
Long-Term Care Insurance
Long-term care insurance can help prevent nursing home, assisted living, or home care expenses from consuming retirement assets. This can be especially important if you have protected part of your retirement portfolio but would otherwise need to liquidate those assets to pay for care later in life.
Life Insurance
Life insurance can provide liquidity for a surviving spouse or beneficiaries and may help replace income that disappears at death. This can become particularly important when one spouse’s Social Security, pension, or other retirement income is reduced after death.
Medicare Supplement and Health Coverage
Planning for Medicare and supplemental coverage can help control healthcare expenses during retirement. Medical costs are a separate risk from market losses, but unexpected healthcare expenses can force retirees to withdraw more money from their investments than originally planned.
What We Recommend
Our rule of thumb is straightforward:
If you can afford to lose money, you can afford to take market risk and wait for a recovery. If you cannot afford to lose the money, you should seriously reconsider whether that money belongs entirely in the stock market.
This becomes particularly important during the five to ten years surrounding retirement.
You do not necessarily need to move your entire portfolio into an annuity. Instead, determine how much guaranteed income you need to cover essential expenses.
Social Security and pensions may cover part of those expenses. A fixed index annuity with a guaranteed lifetime withdrawal benefit can potentially fill the remaining income gap.
Other assets can remain invested for growth.
The objective is not to predict the next stock market crash. Nobody can reliably do that.
The objective is to make sure the next crash does not determine whether you can retire.
Get Free Fixed Index Annuity Quotes
At The Annuity Expert, we’re an independent annuity broker and insurance agency that compares fixed index annuities, premium bonuses, guaranteed lifetime income benefits, and other retirement income options from multiple insurance companies.
We can help determine how much guaranteed retirement income your savings can generate and whether an annuity makes sense for your situation.
Contact The Annuity Expert for free annuity quotes and a no-obligation comparison before purchasing a contract.
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