Are Annuities Recession-Proof? A Closer Look

Some experts predict a recession will hit the U.S. economy within 18 months due to converging global and domestic forces.
In particular, the U.S. job market unexpectedly contracted in early August, triggering a sharp market correction. In July, investors were concerned that the Federal Reserve might keep interest rates elevated longer than expected, given slower job growth and higher unemployment rates. It sent shockwaves through the market when this abrupt sentiment shift occurred.
By August 5th, the S&P 500 had plummeted by over 8 percent, while the NASDAQ Composite had dropped by an even steeper 13 percent. These domestic challenges caused global monetary policies to diverge, further causing the market’s volatility.
As a possible recession looms, retirement planning becomes even more unsettling. After all, when the economy slumps, many people question the safety of their hard-earned savings. However, annuities have attracted attention because they’re a good investment during turbulent times.
When you retire, annuities can provide you with a steady stream of income based on your savings. Depending on the type of annuity, you can begin receiving payments once you reach the age of 59½.
Depending on your preferences, these payments can be scheduled for a specific period of time, like five or ten years, or they can last for the rest of your life. Regardless, this can create a form of guaranteed retirement income for you.
Because of this consistency and steady income, they are very popular with retirees. Similarly to pensions, annuities offer predictable monthly payments that can provide financial stability. So, by converting your annuity to a guaranteed income stream, you can establish a sound financial foundation for retirement. As a result, you will be able to manage market volatility and maintain your lifestyle even during tough economic times.
Even though fixed annuities may not offer as good returns as some investments in booming economies, their consistency during recessions is invaluable. As a result, they offer a sense of security when other income sources become less reliable.
If you want to recession-proof your retirement savings, though, two types of fixed annuities may appeal to you in particular. However, you should keep in mind that the best annuity for you depends on your ability to pay into the contract and how often you can do so.
It’s also important to keep in mind that variable annuities often have hefty fees. Over time, these fees can reduce your returns. Investing directly in the stock market can save you these unnecessary expenses if you’re considering it.
With fixed-indexed annuities (FIAs), interest rates rise and fall along with a market index, such as the Nasdaq or S&P 500. Therefore, when stock prices decline, so do FIA returns during economic downturns.
However, FIAs have a safety net known as a “loss floor,” which is typically set at 0 percent. As a result, your account value won’t decrease despite poor market performance. Although this protects your principal, it also limits the earnings you can make during recessions. When the economy is weak, FIAs may offer modest returns.
When making annuity decisions, consider your overall financial goals, risk tolerance, and time horizon. You should seek advice from a financial advisor to determine the best annuity for you.
It is also important to remember that diversification is one of the best ways to manage risks. Balance your annuities with other investments to create a well-rounded retirement strategy.