Different types of annuities can totally sidestep the market or remain exposed to the market but with reduced risk of losing money in a down market. Continue reading to see 3 examples of annuities that might fit the bill. Questions? Submit the quick form at the bottom of the page and we will get right back to you.
After declining in 2018, the stock market has fared well this year despite heightened volatility of late, including a 767-point decline in the Dow Industrials in early August and an even worse 800-point drop on another day less than two weeks later. That was the worst percentage drop of the year, according to The Wall Street Journal and New York Times.
Often, such market incidents aren’t taken seriously – markets, after all, are often volatile even in good times. But these particular selloffs could be an exception to the rule.
Alongside other economic headaches, including the seemingly intractable U.S.- China trade war, declines in U.S. business investment and substantial declines in economic growth in key European nations and China, a growing number of market pundits and economic gurus have raised huge concerns about the health of the economy amid its longest expansion ever, according to The New York Times and other media outlets. They say the chances of a recession are greater than they have been in a long time.
This raises the $64,000 question: If you’re in the stock market, is it time to lower your risk and protect your gains by turning to less risky financial vehicles? Is the next recession on the horizon, especially since the yield on the benchmark 10-year Treasury note last month broke below the two-year rate – an odd bond market phenomenon that has reliably forecast recessions for decades, according to multiple media sources.
For most people, whether to adjust to this backdrop by changing your investment risk is a highly individualized decision. For starters, you have to determine your risk tolerance. If it is relatively high and you’re in pretty good health, you may want to retain significant stock market exposure, both inside and outside of annuities, regardless of the odds of a recession. The U.S. is not in a bear market.
But even if it were, bear markets eventually end and, historically, the stock market has consistently gone on to register new record highs over time, according to the Credit Suisse Global Investment Returns Yearbook 2018.
On the other hand, many people intensely dislike recessions and the bear markets they spark – especially when they are retired and no longer receive a paycheck — and would very much like to lighten their exposure to the stock market if they see a recession and stock market selloff looming. They would be foolish to bail from, say, a stock market-oriented variable annuity and pay hefty surrender charges. But they can reduce their exposure to the market in a variable annuity and cull their exposure in individual stocks and mutual funds outside of an annuity.
If this is your mindset, different types of annuities can totally sidestep the market, such as fixed annuities, or remain exposed to the market but with reduced risk of losing money in a down market, such as buffered annuities.
Here are examples of three of these annuity types.
- The five-year Sentinel Security Life Co.’s Personal Choice Annuity. Underscoring that investors can in some cases get surprisingly strong returns with extremely low risk, this multi-year guaranteed annuity (MYGA) pays 3.85% annually and is available in more than half the states, including California, Texas and Pennsylvania. Its rate is much higher than the inflation rate – and with zero exposure to the stock market.
By comparison, most MYGAs today are paying an average of about 3.25 percent. And A-rated insurance companies pay still less — typically about 3%.
Investors can withdraw 10% annually without penalty if they’re willing to receive 10 basis points less. The minimum investment is $10,000.
- Athene Accumulator 10 – arguably the best fixed indexed annuity on the market. It pays a 120% participation rate on the BNP Paribas Multi-Asset Dynamic Index, an algorithm-based index comprised of three equity futures indices, three bond futures indices and two commodity indices. This annuity pays gains on a so-called two-year point-to-point basis, which is generally considered better than a one-year basis.
This participation rate is for a 10-year contract. A five-year contract is also available and pays a still-generous 95% participation rate.
More often than not, the BNP Paribas index doesn’t perform as well in a given year as the S&P 500, even with the plus-100% participation rate. That’s because it’s not overwhelmingly a stock-based index, which tends to generate the highest returns over time. But its returns are still respectable and less volatile than the S&P 500 because of greater diversification.
The minimum investment for Athene Accumulator 10 is $10,000. It doesn’t offer a lifetime income rider.
- The AXA Structured Capital Strategies PLUS annuity, the oldest and best-selling buffered annuity, also known as a structured variable annuity or variable-indexed variable. Like a handful of other buffered annuities, this is a cross between a fixed indexed and a variable annuity. In exchange for receiving a higher index participation rate than offered by fixed annuities, investors pick up part of losses in the underlying index in significantly down markets.
Investors have three investment options from which to choose, all six-year contracts. In the most popular option, their gains are calculated over the entire six-year period. They choose between a 10-percentage point downside buffer, a 20-percentage point buffer or a 30-percentage point buffer. The lower the buffer, the higher the participation rate. The higher the buffer, the
lower the participation rate.
Say, for example, that the annuity owner opts for a 10-percentage point downside buffer and the S&P 500 – one of the indexes in which annuity owners can invest – declines 20% over the six-year period. His or her loss would be 10%, not 20%. In this case, there would have been no cap at all on the participation rate. So, if instead, the S&P 500 index gained, for instance, 15% over the entire period, the investor would have received the entire 15%.
The minimum investment is $25,000. There is no lifetime income rider.
The purchase of one or two of these annuities may make sense for many retirees or people nearing retirement. Experts are divided on whether the economy will fall into recession. What they do agree, however, is that the U.S. almost certainly is not in a recession now and may avoid one for the foreseeable future, according to The New York Times. While the chance of a recession has increased sharply in recent weeks, the odds remain unknown.
There is no sign of the sort of bubbles that triggered the last two recessions, such as the housing bubble in the early years of the 21st century. Its demise contributed significantly to the last recession. If there is another recession anytime soon, a likely contributor would be not a bubble but probably a sharp decline in business investment spending, already weakening. As corporations look around the world and make their plans for investment, in general they do not like what they see, according to The New York Times, The Wall Street Journal and other media sources.
This could spread, lead to hiring freezes and layoffs and put a big dent in now-robust consumer spending.
Successful investors always diversify as a hedge against future uncertainty. Annuities are often part of the mix. Whether the U.S. does or does not skirt a recession, it may make sense to consider an annuity.
Editor’s Note: Investing involves risk, including the potential loss or principal. Any references to protection benefits generally refer to fixed insurance products, never securities or investment products.
Annuities are insurance products that may be subject to restrictions, surrender charges, holding periods, or early withdrawal fees which vary by carrier. They are designed for retirement or other long-term needs. Annuity guarantees and protections are backed by the financial strength and claims-paying ability of the issuing insurance carrier.
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