Over the long run, the stock market has been a historically reliable generator of wealth for generations of investors. Over the short run, things are more unpredictable, as evidenced by the 10% drop in the stock market between the end of January and March 2025.
For those who rely on their investments for retirement income, a stock market crash at the wrong time can be devastating to individual financial plans.
Here is a brief list of major U.S. bear markets over the past 30 years:
- 1987. On Oct. 19, 1987, the stock market, as measured by the SandP 500, lost 23% of its value in a single day. This sudden decline occurred in the middle of an even larger correction from Aug. 25 to Dec. 4, 1987, when the SandP 500 fell 33.5%.
- 2000-2002. The "dot-com bubble" saw the SandP 500 fall 49.1% between March 24, 2000, and Oct. 9, 2002.
- 2007-2009. The "housing bubble" collapse caused the SandP 500 to lose 56.8% over 17 months, beginning Oct. 9, 2007, and bottoming on March 9, 2009.
- 2020. The start of the COVID-19 pandemic sparked a short-lived substantial drop in the stock market, followed by a year of volatility. The SandP 500 Index fell more than 34% between its peak in February and its low point in March.
Stocks eventually recovered from these collapses, but many investors who needed income in the aftermath of the crashes never recovered.
Those young(er) and still in the workforce can ride out market downturns and even buy more when stocks are cheap, but retirees reliant on their nest eggs often don't have that option. A bear market forces them to sell assets just when they're at their cheapest, simply to meet living expenses.
Fortunately, there is a place where you can park a portion of your retirement savings to ensure that you weather market volatility and downturns: annuities.
There are various types of annuities, with varying amounts of risk that you may be willing to assume:
- A fixed-rate annuity provides a guaranteed rate of return on the premiums you contribute, so there's no investment risk.
- Variable annuities let you invest in securities, like stocks and bonds, to take advantage of the highs and lows of the financial markets over time. Earnings are tax-deferred until you're ready to start receiving guaranteed income payments, but you must be willing to accept investment risk and volatility.
(Disclosure: There is no way to guarantee the amount of your eventual income payments because market performance cannot be accurately predicted.) - A fixed index annuity offers potential growth tied to a market index (for example, the SandP 500), with a cap on maximum gains, as well as a minimum guaranteed interest rate.
Providing a reliable level of income
Here's why annuities are a great shield to protect your hard-earned savings against volatile markets:
Guaranteed income: Annuities guarantee a consistent income stream. Even during a volatile market, you'll receive a predetermined amount on a regular basis.
Protection against market downturns: Since fixed annuities have a set interest rate, your principal is shielded from market volatility.
Diversification without direct exposure: Variable annuities allow for diversification by investing in various sub-accounts. This can help spread risk across different asset classes without you being directly exposed to market swings.
Tax benefits: Annuities offer tax advantages, such as tax-deferred growth, so you won't pay taxes on your earnings until you start receiving payments. Additionally, if you purchase an annuity with after-tax dollars, a portion of your annuity payments may be considered a return of principal and, therefore, not taxable.
Lifetime income: Many annuities offer the option of guaranteed lifetime income, ensuring that you won't outlive your savings.
Give us a call if you'd like to discuss your options.