How To Make Money in a Bear Market
A bear market is more than just a temporary downturn—it can devastate a retirement portfolio, especially if you’re close to retiring or already drawing income. The average U.S. investor risks locking in permanent losses when selling investments during a decline. But with the right tools, especially Fixed Indexed Annuities (FIAs) and strategic tax and income planning, you can protect your retirement assets, generate income, and make money—even when the market drops.
This comprehensive guide explains how to do exactly that, starting with how FIAs uniquely shield your money from losses while earning interest in recovery years.
Understanding Fixed Index Annuities (FIAs) in Bear Markets
What Are Fixed Index Annuities?
A Fixed Indexed Annuity is a long-term insurance product that earns interest based on the performance of a market index (like the S&P 500), with no exposure to losses during market downturns. Instead of investing directly in the market, your annuity tracks index movement and credits interest using annual point-to-point strategies with a reset every contract year.
How Do FIAs Work in Bear Markets?
FIAs earn interest by tracking the upward movement of a stock market index. This means that even during a bear market, when the market eventually recovers, FIAs benefit from the rising market trend. Unlike direct investments in stocks, which can be volatile and risky, FIAs are designed to capture growth while minimizing the impact of market downturns, providing a safer investment option.
Let’s say you invest $100,000 in an FIA with a 50% participation rate and an annual point-to-point strategy. Here’s how it performs over four years:
| Year | Index Return | FIA Interest (50% Participation) | Account Value | How It Works |
|---|---|---|---|---|
| 1 | –18% | 0% | $100,000 | No loss. Annual reset sets new low index starting point. |
| 2 | +12% | 6% | $106,000 | 50% of 12% = 6%. Gains locked in permanently. |
| 3 | –5% | 0% | $106,000 | Down year again—still no loss. |
| 4 | +9% | 4.5% | $110,770 | 50% of 9% = 4.5% interest credited. |
Total interest earned: $10,770 over 4 years—with no downside risk.
The Staircase Analogy for FIAs
The structure of FIAs can be likened to climbing a flight of stairs. Imagine the stock market as an elevator that moves unpredictably up and down. In contrast, FIAs resemble a staircase, where each step represents a locked-in gain. As the market improves, FIAs ‘climb’ to a new step, securing that level of gain. During downturns, while the market (elevator) may fall, the staircase (FIA) remains at the last achieved step, ensuring that previous gains are not lost.
Why It Works
- Annual Reset: Every contract year, the starting point resets. So losses don’t carry over.
- Annual Point-to-Point: You earn interest on how much the index grows from the start to the end of the year.
- Locked-in Gains: Once interest is credited, it can’t be lost—even if the market crashes later.
- Protection: In down years, your account earns 0%, not negative returns.
Benefits of FIAs in Bear Markets
- Protection Against Market Downturns: FIAs provide a safeguard against bear markets, offering a floor to ensure your retirement savings do not decrease with the market.
- Interest Earnings from Market Recovery: When the market recovers, FIAs earn interest based on the upward movement, allowing for potential growth even in fluctuating conditions.
- Avoiding the Need to Catch Up: Traditional stock market investments often require investors to recover from losses incurred during bear markets. FIAs maintain their position, eliminating the need to recover lost ground.
Convert to Roth IRA During Bear Markets
What It Is:
Converting traditional IRA or 401(k) assets to a Roth IRA during a bear market reduces the amount taxed at conversion. You pay taxes on a temporarily lower value, and all future gains grow tax-free.
Why It Works:
Market downturns create a tax arbitrage. Convert at a low value and enjoy tax-free recovery.
Pros:
- Tax-free withdrawals for life
- No Required Minimum Distributions (RMDs)
- Potential estate tax advantages for heirs
Cons:
- Taxes due at the time of conversion
- May increase Medicare premiums and taxable income temporarily
Best Practices:
- Combine Roth conversions with tax-loss harvesting in your brokerage account
- Use annuity income (from MYGAs or SPIAs) to cover the tax bill without touching principal
- Convert gradually over multiple years to manage your tax bracket
Who Needs It:
- Investors in low-income years
- Retirees delaying Social Security
- High-net-worth households facing future higher tax rates
Who Should Wait:
- Investors on ACA subsidies (conversion income may disqualify them)
- People who expect to be in a much lower tax bracket later
Buy Multi-Year Guaranteed Annuities (MYGAs)
What It Is:
MYGAs are like CDs offered by insurance companies. They provide a guaranteed fixed interest rate for a set term (typically 2–10 years), with no market risk and tax deferral.
Why It Works in Bear Markets:
While stocks and bonds fluctuate, MYGAs offer predictable growth and preserve principal—ideal for reallocating risky assets or parked cash.
Pros:
- Higher yield than many CDs or Treasuries
- Guaranteed, contractually locked rates
- No annual fees or management charges
- Safe option for older investors or conservative savers
Cons:
- Limited liquidity (access is typically via penalty-free withdrawal provisions)
- Rate is fixed—you won’t benefit if rates rise significantly during the term
Who Needs It:
- Retirees seeking bond replacements
- Conservative investors
- Anyone looking for short-to-medium-term safe growth
Who Doesn’t Need It:
- Investors who require immediate access to full principal
- People looking for equity-like upside
Funding Sources:
- IRA, Roth IRA, non-qualified cash, or trust-owned funds
Tip: Ladder MYGAs with different maturity dates to create a rolling stream of predictable returns.
Delay Social Security and Use Income Annuities to Bridge the Gap
What It Is:
Delaying Social Security beyond Full Retirement Age increases your monthly benefit by 8% annually until age 70. Use SPIAs (Single Premium Immediate Annuities) or FIAs with GLWB riders to fund the delay gap.
Why It Works:
It prevents early withdrawals from risky investments during market downturns and maximizes future government-guaranteed income.
Pros:
- Higher lifetime benefit
- Greater survivor benefit for spouses
- Reduces longevity and inflation risk
Cons:
- Requires alternate income source while waiting
- Break-even point usually around age 80
Tip: Use a SPIA for 5–10 years to automate monthly income during your delay period. Pair it with life insurance to protect legacy and replace lost capital if early death occurs.
Rebalance During Market Declines
What It Is:
Rebalancing means restoring your portfolio’s target asset allocation by buying underperforming assets and selling winners.
Why It Works:
In bear markets, rebalancing typically means buying equities at a discount using bond or cash reserves.
Pros:
- Systematically buys low and sells high
- Maintains long-term risk alignment
- Reduces emotional decision-making
Cons:
- Can trigger taxes in taxable accounts
- May not work well in “everything down” markets
Who Needs It:
- Retirees using systematic withdrawals
- Growth investors who want to remain diversified
Who Doesn’t Need It:
- Investors who’ve moved everything to annuities or guaranteed contracts
- Those too risk-averse for equity reallocation
Use Tax-Loss Harvesting to Offset Taxable Income
What It Is:
Selling investments in a brokerage account at a loss to offset gains or ordinary income, especially helpful during major declines.
Why It Works:
Converts paper losses into real tax savings that reduce current or future tax bills.
Pros:
- Offset unlimited gains and up to $3,000 of ordinary income per year
- Reduces tax on Roth conversions or RMDs
- Can reinvest proceeds in similar—but not identical—investments
Cons:
- Wash-sale rules can disqualify losses
- Requires accurate recordkeeping
Tip: Work with a fiduciary advisor or CPA to coordinate loss harvesting with Roth conversions or charitable giving for maximum tax benefit.
Bonus: Combine Strategies for Even Greater Protection
| Strategy Combination | Purpose |
|---|---|
| FIA + Roth Conversion | Grow tax-free with no market losses |
| MYGA Ladder + Social Security Delay | Guaranteed income now, max benefits later |
| SPIA + Life Insurance | Immediate income with legacy protection |
| Dividend Stocks + FIA | Income now, principal protection later |
| Tax-Loss Harvesting + Roth Conversion | Offset taxes while reducing future liabilities |
Summary: What to Do Right Now in a Bear Market
- ✅ Shift risky investments into FIAs for protection and participation in recovery
- ✅ Use Roth conversions while balances are low to reduce future taxes
- ✅ Replace bonds and CDs with MYGAs for higher, guaranteed interest
- ✅ Bridge early retirement or Social Security delay with SPIAs or GLWB annuities
- ✅ Harvest tax losses and rebalance while markets are down
- ✅ Review your entire income and withdrawal plan for sequence risk
Need help finding the right product or strategy for your situation?
Contact The Annuity Expert for free annuity quotes, MYGA comparisons, and customized bear market income plans. We’ll help you protect what you’ve saved and grow what you still need—no matter what the market does.
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Questions From Our Readers
What to do during a bear market?
During a bear market, it is essential to rebalance your portfolio. Diversifying with stocks, bonds, and cash will ensure you remain agile in turbulent markets. Tax-Loss Harvesting can help alleviate the impact of significant losses while investing in risk-averse assets like gold or treasury bills can protect from significant downturns. Taking advantage of any opportunities to buy into low points and staying on course through the storm is critical when navigating volatile conditions.
What to avoid in a bear market?
During a bear market, it is essential to avoid the following mistakes to protect your investments: Fleeing from volatility; Not having cash reserves; Accidentally activating the wash-sale rule; Listening to panicked analysts’ predictions, and Obsessively monitoring your accounts.
Is a bear market down 20%?
A bear market is often characterized by a 20% drop in significant stocks, an arbitrary measure. However, it can also be seen when investors tend to shy away from risk rather than seek growth opportunities. With either definition, the markets present an undeniably difficult climate for those looking to invest their capital.
What is a bear market vs. recession?
A bear market is a multi-month period in which the prices of securities fall by 20% or more. Meanwhile, a recession occurs when economic activity (as evidenced by GDP) drops for two straight quarters.