Why Your Retirement Could Be At Risk Without a Backup Plan
Variable annuities are directly tied to the performance of the stock and bond markets through their subaccounts. When the market crashes, so can the value of your variable annuity. This reality is often misunderstood by retirees who assume annuities are inherently safe. That’s not always true, especially with variable annuities.
How It Works: Variable Annuities in a Market Crash
Variable annuities invest your money in subaccounts that function like mutual funds. These subaccounts are tied to market performance. If the market drops 30%, and you’re fully exposed through equities or bonds in your subaccounts, your annuity value drops too. Some contracts offer optional living benefit riders like Guaranteed Lifetime Withdrawal Benefits (GLWBs). These riders ensure income for life, even if the account value goes to zero. However, these benefits come with conditions, fees, and restrictions.
Solutions: Every Strategy to Protect Your Annuity From Market Crashes
GLWB Rider (Guaranteed Lifetime Withdrawal Benefit)
- How It Works: Adds a guaranteed income stream for life, even if the annuity value drops to $0.
- Pros: Protection from outliving your money.
- Cons: Annual fees (typically 0.95%–1.5%). Payouts are often lower than annuitization in early years.
- Who Needs It: Anyone relying on the annuity for lifetime income.
- Who Doesn’t Need It: Those not using the annuity for income or who have other guaranteed pensions.
- Backup Insurance: Consider life insurance to protect the remaining value for heirs.
Reallocate to Stable Subaccounts or Fixed-Rate Options
- How It Works: Move your funds to a money market or bond subaccount, or use a fixed-rate option if available.
- Pros: Reduces volatility during downturns.
- Cons: Limits upside growth if the market rebounds.
- Who Needs It: Near-retirees or those drawing income soon.
- Who Doesn’t Need It: Younger investors with a long time horizon.
Use a Fixed Indexed Annuity Instead
- How It Works: Tracks index performance with no market downside, offering partial market gains and full protection from loss.
- Pros: No fees (in most cases), downside protection, modest upside.
- Cons: Less growth than true market exposure.
- Who Needs It: Anyone seeking market-linked growth without risk.
- Who Doesn’t Need It: Active investors who want full equity exposure.
- Related Coverage: Fixed indexed annuities with GLWBs can replace variable annuities entirely for safer growth and guaranteed income.
Buy a Multi-Year Guaranteed Annuity (MYGA) Instead
- How It Works: Like a CD, offers a guaranteed interest rate over a set period with zero market exposure.
- Pros: No risk, predictable growth.
- Cons: No upside beyond the fixed rate.
- Who Needs It: Those looking for short-term security or a bond alternative.
- Who Doesn’t Need It: Growth-focused investors.
- Additional Insurance: Can be laddered with long-term care annuities for additional benefits.
Annuity + Life Insurance Strategy
- How It Works: Use an annuity for income and life insurance to replace lost value or leave a legacy.
- Pros: Protects income and creates wealth transfer.
- Cons: Life insurance approval requires underwriting.
- Who Needs It: Legacy-minded investors.
- Who Doesn’t Need It: Single individuals with no heirs or estate goals.
Compare Annuity Income
Why Market Risk in Variable Annuities Is Often Misunderstood
Variable annuities are the most expensive type of annuity. Fees range from 2% to 4% annually when you add mortality and expense charges, rider fees, and fund costs. These fees compound losses in a crash. Worse, most consumers buy them assuming annuities are “safe”—only to find out their value is at risk and fees don’t stop even when the market drops.
What Type of Accounts Can Fund a Safer Annuity Alternative?
- Traditional IRA / 401(k): Tax-deferred rollovers into Fixed Indexed Annuities or MYGAs.
- Roth IRA: Tax-free growth and tax-free income from an annuity.
- Non-qualified funds (brokerage, savings): Can be used to fund tax-deferred annuities with principal protection.
Bottom Line: What You Should Do Now
Variable annuities may expose you to major losses during market crashes. If you’re using the annuity for income, make sure you have a GLWB rider. If you’re using it for growth, replace it with a fixed indexed annuity to remove market risk entirely. Pair it with life insurance if legacy protection is also a concern. Contact The Annuity Expert now to compare annuity products that protect your money from market crashes. Get free quotes and avoid expensive mistakes.
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