MAY 04, 2021
Since the COVID-19 pandemic took hold in the U.S., many changes have taken place. These include physical and social distancing, no-contact food delivery, and virtual meetings in both business and personal environments. Unfortunately, many businesses – both large and small – have gone under, leaving employees and owners to look for other income alternatives.
In order to help stimulate the economy, the Federal Reserve has provided funds to millions of citizens. And with vaccines now readily available, it is anticipated that the economy will continue to recover.
Or is this really just an illusion?
Taking a Closer Look at the Post-COVID Stock Market
Many investors would never have dreamed that the stock market would recover less than one year after taking a severe beating in early 2020. But the number at the closing bell could lure investors into a false sense of security.
For instance, according to the man who many people believe to be the world’s greatest investor – Warren Buffett – the stock market is currently overvalued. In fact, by his calculation, which looks at the value of the market versus GDP, the stock market is overvaluing the economy by approximately 88%. Further, the P/E, or price to earnings ratio, on the S&P 500 also signifies that the market is overvalued and, in turn, that volatility will likely continue going forward.
In addition, while many consumers and business owners were relieved to receive one or more stimulus checks from the Federal government, there are now (in the second quarter of 2021) 40% more dollars floating around in the economy than there was just one year ago.
So, given the laws of supply and demand, things may get rough for investors again before – or if – things ever settle back down. With that in mind, investors and retirees alike need to take a serious look at how much of their portfolio is at risk.
How Much Risk Can Your Portfolio Withstand?
Now more than ever, protecting your principal is crucial. Even with the S&P, NASDAQ, Dow Jones Industrial Average, and the Small Cap Index at historical highs, it is possible that the bottom could drop out at any time…and next time, we might not be so lucky to recover so quickly (or at all).
Take, for instance, the Nikkei 225, a Japanese stock market index that is connected to the third-largest economy in the world, just behind China and the United States. This index is oftentimes considered similar to the S&P 500 index in the U.S.
In late December 1989, the Nikkei 225 hit an all-time high, closing at 39,915.87. It then plummeted, losing more than 70%, and in early 2010, the Nikkei stood at just over 9,300. As of April 2021, the Nikkei 225 has still not come back, standing at under 29,000.
Many investors who used a “buy and hold” strategy back in the late 1980s are still “waiting” for the market to come back to its previous highs. It is likely that over the 30+ years since the market’s correction, many investors have had to change course and/or reduce the lifestyle that they had hoped for in retirement.
What’s to say that the same thing can’t happen in the U.S.?
Nothing…which is why it is essential to build in safety precautions to your retirement plan that can keep you from losing value, even in the event of a substantial market drop. One way to do that is by including a fixed indexed annuity.
Why Fixed Indexed Annuities Could Be the Solution
Fixed indexed annuities, or FIAs, are a type of fixed annuity. The key difference between fixed indexed annuities and regular fixed annuities is in the way that returns are calculated. FIAs track one or more market indexes, such as the S&P 500. When the underlying index(es) perform well in a contract year, the annuity is credited with a positive return – typically up to a limit, or “cap”.
In return for the limited upside gains is principal protection – even in a drastic downward moving market. In this case, if the index(es) being tracked incurs a loss in a given contract year, there is no negative return posted to the fixed indexed annuity.
Rather, it is instead credited with a guaranteed minimum “floor.” This means that there is no loss to make up for when an index turns back around and starts earning positive returns again. In addition, the growth that takes place inside of a fixed indexed annuity is tax-deferred. So, the gains can continue to grow on top of gains, which can allow growth to compound exponentially.
While many investors can withstand some money at risk in the stock market (with the opportunity for high return,) it can make sense to take at least a portion of your portfolio and keep it protected – especially because the “safe” component can provide much higher returns than those being offered on bonds, CDs, Treasuries, and other “safe money” assets.
Locking in an Income “Floor”
Fixed indexed annuities offer additional benefits, too, such as ongoing income in retirement. Today, few companies offer employer-sponsored defined benefit pension plans – and without this guaranteed income to rely on, many retirees can be at risk of running out of money while it is still needed.
Even with Social Security retirement benefits, the average wage earner only replaces about 40% of their pre-retirement earnings (and for higher-income earners, this replacement percentage is even less.) The income from an annuity can essentially “replace” incoming cash flow that won’t be received from a pension plan.
With an income floor in place, the concern over expenses can be reduced, because a regular payment will arrive as anticipated – regardless of what happens in the stock market. Not only can this create a sense of financial security, but it can also lead to a happier, healthier retirement because you will be able to focus on other things, such as spending time with loved ones and doing the things you enjoy.
Is a Fixed Indexed Annuity Right for You?
The financial impact of the COVID-19 pandemic has spread far and wide. While it was impossible to know just how severely the virus would change our financial lives, it can certainly be a wake-up call for protecting ourselves from future market disasters. This is why fixed indexed annuities should be considered a crucial component of an optimal portfolio.
Even given all of the positive features, though, not all fixed indexed annuities are exactly the same. That’s why it is important to discuss your specific objectives with an annuity specialist who can point you in the right direction.
At Annuity Gator, our mission is to ensure that consumers and financial professionals are educated about how annuities work, and whether or not these financial vehicles are right for their specific situation and needs.
If you would like to set up a time to chat with an Annuity Gator specialist, please feel free to contact us by phone at (888) 440-2468 or by email through our secure online contact form here. We look forward to answering your questions about your future financial and retirement security.