How to Protect your Retirement from a Stock Market Crash

You are closer to retirement now more than ever. Imagine how it would feel if 6 months before you planned to retire, the stock market drops over 20%. This has happened 6 times since 1998. History shows this could happen at least 6 more times during your retirement. A stock market crash can be a scary thing. Suddenly, the value of your investments can plummet, and you may not know what to do.

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First, it’s important to remember that your retirement accounts are long-term investments. This means you shouldn’t panic if the stock market drops. While it’s true that your account balance may go down in the short term, it will likely rebound over time. HOWEVER, if you are planning on withdrawing money from your retirement portfolio, what you are about to read next may make the difference between having enough money that will last you through your entire retirement or going broke.

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Sequence of Return Risk

If you are a believer in the old adage “the stock market always comes back”, read on.

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The risk of receiving lower or negative returns early in your retirement when making withdrawals from an investment portfolio, is known as Sequence of Return Risk. If you are planning on taking withdrawals from your retirement savings, the order or the sequence of returns can significantly impact your portfolios overall value.

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Consider the following hypothetical investment scenario below for Mr. Green and Mr. Brown.

Mr. Green and Mr. Brown both started with an initial $1 million investment portfolio at the age of 65. They start taking 5% withdrawals (of the initial value) beginning immediately at the age of 66. Mr. Green begins taking withdrawals in an up market, giving him the optimal environment to maintain his portfolio value long-term. Unfortunately, for Mr. Brown, he starts taking income in a down market and depletes his entire portfolio before reaching age 83. Both averaged a 6% annual rate of return, both had very different outcomes.

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The sequence of investment returns can significantly impact your investment portfolio when taking distributions. But, if you take the proper steps, you can protect your retirement savings and ensure they continue growing and provide you with lifetime income you'll need.

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How We Protect Your Retirement Funds from a Stock Market Crash

For old 401(k)s and IRA's, we suggest considering a fixed index annuity which allows you to get market exposure without the risk of loss and can provide you with a lifetime of income Here's how it works:

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Investing for retirement is a critical aspect of financial planning, and as such, it’s essential to make informed decisions. Retirement planning involves making investments that will provide long-term growth and stability while minimizing risk. One investment vehicle that has gained popularity in recent years is the fixed-indexed annuity (FIA). This article will explain how fixed-indexed annuities allow investors to earn interest based on stock market performance with protection from market losses.

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Understanding Fixed Indexed Annuities

Fixed-indexed annuities are insurance products designed to provide a guaranteed growth and income stream in retirement. They offer a combination of principal protection and the potential for growth based on the performance of a market index, such as the S&P 500. In addition, unlike variable annuities tied directly to the stock market, fixed-indexed annuities offer protection against market downturns.

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How Fixed Indexed Annuities Work

When you purchase a fixed indexed annuity, you essentially enter into a contract with an insurance company. You provide the insurance company with a lump sum of money, and in return, the insurance company promises to provide you with a guaranteed growth and income stream for a set period or the rest of your life. The income you receive depends on the size of your initial investment, the contract’s length, and the underlying index’s performance.
 

How does a Fixed Indexed Annuity Allow Me to Invest Without Losing Money?

A fixed-indexed annuity allows you to invest in the market without losing money because it offers principal protection against market downturns. When you purchase a fixed indexed annuity, you essentially enter into a contract with an insurance company. The insurance company promises to provide you with a guaranteed principal protection, a minimum growth rate and in some cases, an income stream for a fixed period or the rest of your life, in exchange for a lump sum.
 

Unlike traditional fixed annuities, which offer a fixed interest rate, fixed-indexed annuities offer the potential for growth based on the performance of a market index, such as the S&P 500. However, your principal investment is protected even if the market index performs poorly.

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How this works is that the insurance company uses a formula to calculate the interest credited to your account. The formula considers the market index’s performance, with some fixed-indexed annuities having caps on the interest you can earn. If the market index performs well, you can earn higher returns than traditional fixed annuities. However, if the market index performs poorly, your principal investment remains protected, and you do not lose money.

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Lock-In Gains

All gains earned in a fixed indexed annuity are locked in and can never be lost in a down market. Once you earn the compounded interest, it is yours to keep.
 

Benefits of Fixed Indexed Annuities

One of the most significant benefits of fixed-indexed annuities is their protection against market downturns. Even if the stock market crashes, your principal investment remains protected. Additionally, the potential for growth based on the performance of a market index means that you can earn higher returns than traditional fixed annuities. Fixed-indexed annuities also offer tax-deferred growth, meaning you don’t pay taxes on your investment until you begin to withdraw funds.

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Risks and Drawbacks of Fixed Indexed Annuities

While fixed-indexed annuities offer many benefits, they also have risks and drawbacks. One of the primary concerns is the complexity of the contracts, which can make it challenging to understand the terms and fees associated with the investment. Additionally, some fixed-indexed annuities have caps on the interest you can earn, and some may have surrender charges if you withdraw funds before the end of the contract term.
 

How to choose the right Fixed Indexed Annuity for Retirement

Choosing the right fixed-indexed annuity for your retirement portfolio can be challenging. Researching and comparing different products, such as fees, caps, and surrender charges, is essential. When selecting an annuity, consider your investment goals and risk tolerance. Working with us, we can help you navigate the complex world of fixed-indexed annuities and help you make informed decisions about your retirement investments.

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Tips for investing in a Fixed Indexed Annuity

If you decide to invest in a fixed-indexed annuity, remember some tips. First, understand the contract’s terms and conditions, including fees, caps, and surrender charges. It would be best to research the insurance company offering the annuity to ensure its financial stability and reputation. Finally, it’s essential to diversify your retirement portfolio, including fixed-indexed annuities, to minimize risk and maximize potential returns.
 

Conclusion

Fixed-indexed annuities offer a unique investment opportunity for retirement planning, providing a combination of principal protection and the potential for growth based on the performance of a market index. However, these investments come with risks and drawbacks, so it’s essential to research and compares different products to find the right fit for your retirement portfolio. Nevertheless, with careful consideration of your investment goals and risk tolerance, fixed-indexed annuities can be an effective tool for building a secure retirement income stream.

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