Protecting Retirement Savings From a Market Downturn

A market loss can be difficult at any age. But a significant loss in the years just before or just after retirement can be especially challenging because there may be less time to recover while you may also be beginning to withdraw money from your savings.

This is sometimes called sequence-of-returns risk. Two people can experience the same average investment return over time, yet the person who experiences significant losses early in retirement while taking withdrawals may have a different outcome than someone who experiences those losses later.

Some annuities are designed to address certain aspects of this risk. A fixed annuity credits interest according to the terms of the contract and can provide specified guarantees from the issuing insurance company. A fixed indexed annuity credits interest based in part on the performance of a market index, subject to the contract’s participation rates, caps, spreads, and other terms. Index declines generally do not directly reduce the contract value due to the index, although other factors can affect the value of the contract.

These guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities can also have surrender periods, surrender charges, fees, withdrawal limitations, and other contract provisions. They are generally designed for long-term use rather than money you expect to need immediately.

An annuity is not intended to hold all of your retirement savings. For some people, allocating a portion of retirement assets to a product designed to provide principal protection and contractual guarantees may be one part of a broader retirement strategy.

Understanding how an annuity works—including its guarantees, limitations, costs, and surrender provisions—is an important part of determining whether it fits your retirement plan.

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