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Retirees Must Inevitably Face Scary Stock Markets

By , with Annuity FYI

One step adventuresome folks might take, even if it involves selling stock positions at a loss, is looking into a structured variable (buffered) annuity. Buffered annuities are roughly similar to fixed indexed annuities with one notable exception – they pay markedly higher index participation rates and in return require investors to absorb a portion – but by no means all – of a decline in the stock market.

(Editor’s Note: This article is a keeper because it’s timeless and loaded with valuable insight. It was initially posted in March 2020, when the stock market was cratering. Those days passed and the market subsequently soared, and in October 2021, it’s still up handsomely for the year. At some undetermined point, there will be another major sell-off, but nobody knows when, notwithstanding the comments of some pundits. As this article underscores, it’s not important. What counts is the discipline to retain exposure to the stock market, the single best financial asset, through ups and downs. Long-term players typically win. Shor-term players sometimes win but usually lose.

The success of buy and hold has been proven by historical data and is or was the preferred investing strategy of industry giants such as Warren Buffet and Benjamin Graham. Buy and hold is also best for investors without a lot of time to spend researching the market. The fundamental argument supporting this strategy is that stocks of well-run companies typically increase in value over time. Buying and holding allows you to ride out the up-an-down noise of the market and capture these gains. 

The long-term average annual return of the market, including dividend reinvestment, is about 10 percent. Only investors who stay the course through sell-offs enjoy such returns, and many have a hard time doing so. They panic and sell, and their returns fail to capture average annual performance. The problem is that they don’t know when to get back in the market and miss much of the rebound. Annuities help prevent this because premature selling of contracts generate substantial surrender fees.)

If you’re reading this, you own an annuity or annuities or you have thought about buying one, at least from time to time. And let’s face it – you’re probably deeply concerned about today’s unusually rapid and brutal stock market selloff because you also have stock market exposure and want to lay your hands on almost any article offering investment advice amid this turbulent period.

No doubt, most Annuity FYI readers know something about the stock market, as well as annuities, if only because you have been told not to put more than a maximum of half of your investable funds in annuities. That’s because annuities are fundamentally illiquid investments (with the exception of the customary 10% penalty-free withdrawals annually).
So, what should owners of stocks and annuities – many of whom also have a respectable amount of additional investable cash – do today?

Most important, try not to panic. If you own a fixed annuity or fixed index annuity (FIA) the insurance company that underwrites your annuity or annuities guarantees that you will not lose money – or, in the case of so-called structured variable (buffered) annuities – that you will not lose as much as the market itself. (One exception is variable annuities (VAs), which unlike other annuities invest directly in the market. But these have been unpopular in recent years, primarily due to relatively higher fees than their mutual fund cousins.)

There’s a lot to be said for this. Consider, for example, world-famous investor Warren Buffett’s two most famous rules for investing. “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.” That said, as they say, “Never say never” and the stock market alone cannot achieve Mr. Buffett’s rule, at least not over the short haul, but fixed annuities and fixed index annuities can (at least so far).

The two greatest motivators in any human being are fear and desire. Desire can quickly turn into greed and fear can turn into panic. Many annuities may put you ahead of all the folks who do not own annuities and typically invest all or most of their money in stock and bonds inside and outside of IRAs and 401(k) s. Bond prices usually rise when stocks sell off, mitigating some of the financial pain, but that is not happening right now for complex financial reasons.

Once you put panic aside, you should ask yourself whether you made the right decisions up until now in buying a mix of stocks and bonds and annuities. In most cases, the answer is yes. Investors have often been attracted to stocks because historically they’ve performed well over time – notwithstanding steep selloffs like the one today.

There has yet to be a stock market selloff that was not eventually followed by all-time stock market highs. Indeed, this was exactly the case around mid-February – just before the latest selloff began. To benefit, you simply have to have the discipline to resist selling amid a market downdraft. The ability to adhere to your plan is predicated on making certain that you employ the appropriate asset mix most suitable to your risk tolerance and income needs, then rebalance your portfolio periodically.

So why was it a smart move for retirees or near-retirees to mix investments in annuities with investments in the stock market?

In a nutshell, the answer is that we are, after all, human beings – and many human beings have a problem responding well to bad news, especially when that news is being compared to the early 1930s when we entered the Great Depression.

When the stock market sells off, most intelligent stock market investors know they should hang tight and not sell. But this essential discipline – never easy – is all the tougher when you become a retiree and no longer receive a regular paycheck. Most retirees rely on their investments, at least in part, to pay their bills.

So, when the stock market craters, as it is doing today, all but the bravest seniors get at least somewhat nervous. Yes, most know the market will eventually rebound. But how much? And how long will it take before the market gets back to, or near, its February highs?

Nobody has a truly good answer for this. But given the rapidity and depth of this selloff – not to mention the fact that virtually all economists are saying that a long-overdue recession was imminent – it is highly likely that it will take some time, perhaps years.

This is troubling for most people, but especially seniors. Remember, most tap their investments to pay part of the bills. When you do this while the market is down, you’re obviously selling some stocks at a permanent loss, if you are equity heavy. Plus, many seniors have additional obligations, such as perhaps a promise to help fund college expenses for their grandchildren.

There is a timetable on this. If the stock market takes a relatively long time to fully recover, can seniors who make such promises deliver?

Such questions are tough – but less tough for those who also own non-VA annuities because they are not losing money on paper.

Finally, what options are currently being considered by retirees?

One step adventuresome folks might take, even if it involves selling stock positions at a loss, is looking into a structured variable (buffered) annuity. Buffered annuities are roughly similar to fixed indexed annuities with one notable exception – they pay markedly higher index participation rates and in return require investors to absorb a portion – but by no means all – of a decline in the stock market.

One such option, Athene Amplify, is now highlighting a six-year annuity and makes available, as one of their options, the S&P 500 Index paying a 140% participation rate to the index’s actual six-year return. Investors also get 20% downside protection over this period. Note: There is a .95% annual fee and, although this is not a traditional variable annuity, it is sold by prospectus because it doesn’t offer 100% downside protection like its fixed index annuity cousin. In addition, Equitable (formerly AXA-Equitable) and Brighthouse (formerly MetLife) both have similarly structured products. Buffered annuities also do not include market dividends.

Another option down the road for select folks would be to think about putting some extra cash to work in a fixed indexed annuity – a so-called FIA. These typically purchase options on seemingly risky stock market indexes. This risk is actually considered very low, assuming the underwriting insurance company remains solvent, because they guarantee that investors will not lose money in a down market.

Insurance companies make this work because investors receive only a partial gain of what the stock market index does in good years, e.g. 40-50% participation in the S&P 500 in good years, but none of the downside when the market goes down. There are also lower volatility index options that offer a 100% or greater participation rate in those offerings. After all, there is no such thing as a free lunch, but for those who want stock market exposure – coupled with 100% downside protection – this can also be an attractive opportunity.

Given rock-bottom interest rates and such a shaky stock market, what more can a risk-averse person ask for?

Prospective purchasers of structured variable annuities including Athene Amplify, Equitable Capital Strategies PLUS, and Brighthouse Shield; must keep in mind that there is a risk of loss and no FDIC guarantee to recover losses. These annuities are securities, sold by prospectus that invest in stock market indexes that will rise or fall. Unlike a fixed indexed annuity, there is no guarantee against 100% of potential losses. People who want more information should contact their financial advisor.

For more information about the product mentioned in this article contact us here:

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