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Fixed Annuities Help Reduce Bull Market Risk


The current bull market has the portfolios of many investors heavy on the stock side, and all of this talk about the inevitable move to a bear market has some getting nervous. Financial experts agree that it’s important to rebalance every once and awhile, and in order to reduce bull market risk, consider moving some of your money out of stocks and into various alternatives.

Traditional options are available, but don’t always suit the needs of all investors. Money market funds, while liquid and safe, pay little interest. Certificates of deposit (CDs) are insured by the FDIC but are not as liquid and also pay modest yields. Bond funds are liquid and convenient, but again, short-term funds pay modest yields. Longer-term funds may pay more, but their share prices are vulnerable to interest-rate hikes.

Another alternative that is proven to lower your risk but often overlooked is the fixed annuity. They can cut your taxes, boost your yield and guarantee your principal. On the downside, annuities do have limited liquidity, so they are best for investors who can hold them to maturity, typically 3-10 years, depending on the terms of the contract.

A recent article from MD Magazine detailed the specifics of the 2 main fixed annuity choices: fixed-rate and fixed indexed annuities. Both options lower your risk profile and protect your principal. Continue reading for more on these retirement planning options.

Fixed-rate annuities are similar to CDs but pay more.

Just like a CD, a fixed-rate annuity pays a guaranteed rate for a set number of years, but also offer two key advantages: tax deferral and (usually) a higher rate than a CD with a similar term. You can earn up to 3.30% for a 7-year annuity, up to 3.15% for a 5-year contract, and up to 2.10% for a 3-year annuity. Annuities are issued and guaranteed by insurance companies, making it crucial to choose a financially strong company. After the term is over, the owner can choose to roll over money into another annuity and continue to defer taxes or annuitize the contract to create a stream of income guaranteed for life.

Fixed Index annuities: guaranteed principal plus upside potential

While many are concerned about downside risk, the potential of missing out on potential stock market gains is equally as bothersome. A fixed indexed annuity addresses both, allowing you to have your cake and eat it too. The rate of interest it pays annually is based on the changes to a market index, such as the Dow Jones Industrial Average or S&P 500. When the index value increases, interest is credited. Additionally, when the market falls, you lose nothing, even in the event of a crash as seen in 2008. In exchange for guaranteed principal, you will receive only part of the market’s gains. You won’t know the interest rate you’ll earn until the index or indexes have completed their measuring period, typically annually, but sometimes 2-3 years or more. There may even be years when you earn no interest.

Rebalancing your portfolio to reduce risk periodically is important. Be sure to consider all your money, in both taxable and retirement accounts when you do. Even though most people only think of using fixed index annuities for taxable (non qualified) money, they are also a compelling choice for a portion of your IRA or Roth IRA money.

“Despite the tax-deferral feature not applying to a retirement account, which is already tax-deferred, a fixed annuity still has the benefits of guaranteed principal and a higher yield than a CD or most other fixed-income options.”

Written by Rachel Summit

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