Recently, AIG released two great pieces of information titled Solutions For A Changing Market and Market Commentary. These discuss the recent changes in the equities market and how using an annuity for your retirement is a great way to protect yourself from the ups and downs of the market.
Risk Vs Potential Return
Stocks in the equities market have traditionally far outperformed other safer forms of investments such as bonds and treasury bills. However, despite overperforming those other kinds of investments, the stock market has large amounts of fluctuation and sometimes extended down periods that can cause unnecessary worry and stress. This stress can lead to investor behavior that results in them making a lower return than they would have if they had remained calm. For example, a market drop like the one at the beginning of the Coronavirus outbreak can occur and an investor might start pulling some of their capital out of the market to protect it, but this selling during a low period will lead to a lower rate of return for their overall investment when the market recovers and they begin putting money back into the market.
Recent Market Performance
The markets are in a rather strange place at the time of writing this as the total markets have hit new highs and appear to have recovered from the dip caused by the Coronavirus outbreak. However, if you look deeper most companies are still lagging behind their pre-pandemic levels and large tech stocks are holding the overall numbers higher. Some things that are expected to happen shortly are also affecting market performance:
- The possibility of a vaccine is giving hope to investors that the economy will recover.
- Public schools opening or not opening effects parents’ abilities to go back to work.
- Coronavirus cases increasing abroad.
Sequence Of Returns
When you begin taking from your retirement investment in a standard stock account can have a big impact on how long your retirement income lasts as well, and if you begin taking from your retirement fund during a down year in the market it can compound losses. The market performance has a much bigger impact on your investment once you begin withdrawing from it than when you are paying into it. This is due to taking away from your investment during a low point in the market doubles down on the loss that was already going to happen because of the drop in the market.
Protecting Yourself From These Low Moments
While investing in the stock market is a great idea for many investors because it can create the highest returns of the widely available investment options, protecting your retirement fund with an annuity could be a better option. An indexed annuity has a rate of return that is based on a stock index like the S&P 500 but has a slightly lesser rate of return in exchange for protection against down moments in the market. These annuities have a minimum rate of return of 0% meaning that you will never lose any of your principal in the way you can in the stock market. This down year protection can lead to an annuity investment having an equal or higher rate of return than standard investments, but with a much less bumpy road there. This type of annuity can be a fantastic option for planning your retirement, especially in the volatile financial landscape that we find ourselves in right now.
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