How Annuities Help Protect Against Market Volatility
Market ups and downs are a natural part of investing—but when you’re retired or approaching retirement, volatility can feel less like a rollercoaster and more like a threat. A sudden drop in your investments right when you begin drawing income could put your long-term financial security at risk.
That’s where annuities can play an important role in creating stability. Designed to provide guaranteed income, annuities offer a layer of protection that can help you weather market turbulence without jeopardizing your retirement lifestyle.
What Is an Annuity?
An annuity is a contract between you and an insurance company. You pay into the annuity—either as a lump sum or through a series of payments—and in return, the insurer agrees to provide you with regular payments in the future. These payments can last for a set number of years or for the rest of your life.
Some annuities begin paying immediately, while others allow your money to grow before payments begin. The key feature is predictability: you know what to expect, regardless of how the stock market performs.
How Annuities Offer Protection from Volatility
There are several types of annuities, and each offers different levels of protection from market swings:
Fixed annuities provide a guaranteed interest rate and a set payout schedule. These are not affected by the stock market, making them ideal for conservative investors who prioritize stability.
Indexed annuities offer returns based on the performance of a market index (like the S&P 500), but with built-in protections. If the market performs well, you earn a portion of the upside. If the market declines, your account may earn nothing that year—but it won’t lose value.
Variable annuities are tied directly to investment portfolios and carry more market risk, but some include income guarantees or riders that protect against outliving your savings, even if the investments underperform.
These features make annuities attractive to retirees who want to secure a portion of their income and avoid being forced to sell investments during a downturn.
The Role of Sequence of Returns Risk
One of the biggest challenges in retirement is what's known as sequence of returns risk. This refers to the danger of poor investment returns early in retirement, which can dramatically reduce how long your money lasts—even if average returns later on are strong.
Imagine retiring right before a market downturn. You start withdrawing income while your investments are losing value. This not only reduces your portfolio, but it also means there’s less left to rebound when the market recovers.
Annuities help guard against this by carving out a portion of your savings into a product that provides guaranteed income, regardless of market timing. This allows the rest of your portfolio to remain invested without the pressure of drawing income during bad years.
Should Everyone Use Annuities?
Not necessarily. Annuities are a tool—just one of many available for building a secure retirement. They come with fees, terms, and trade-offs, so they’re not a one-size-fits-all solution.
However, for many people, annuities can provide peace of mind. They create income you can’t outlive, reduce your reliance on volatile markets, and offer a sense of financial stability during uncertain times.
A retirement planner can help you evaluate whether an annuity fits your broader retirement strategy. It’s about balance: protecting your income while still allowing for growth and flexibility.
Want to explore whether an annuity is right for you? Let’s talk. Schedule a no-obligation meeting with a retirement planner at Sound Retirement Solutions and discover how guaranteed income can bring peace of mind to your retirement plan.
