If 2020 taught us anything, it’s that practically anything can happen. So then, what can you do to be prepared? Let’s first learn about protecting your money during a recession.
What Happens In a Recession?
A recession occurs when Gross Domestic Product (GDP) drops for 2 quarters (or more) back to back. So in simple terms, what does this mean? Well, a few things. First, during a recession, household incomes are down, and unemployment is high. Additionally, consumer spending is low. In addition to that, the stock market typically drops as well. In fact, many investors usually pull their money out of the market completely. Businesses may begin to lose money, and as a result, have to lay off workers. And as if all this wasn’t enough, people generally spend less money because of low employment. As a result, there’s less and less money flowing through the economy. For many people, a recession leads to a feeling of uncertainty.
The Stock Market During a Recession
No one can ever know for sure what the stock market will do at any given time. But we can use history to give us an idea of what could happen. Typically, a recession will cause a stock market drop. Hence, if you have your retirement accounts invested in the stock market during a recession, you might lose money. This may be okay if you’re still working. But when you’re in retirement, a stock market crash is a risk you might not want to take. Thankfully, we can show you ways to protect your money during a recession.
Fixed Indexed Annuities: An Answer to Protecting Your Money During a Recession
Fixed indexed annuities, or FIAs, are a product that may help you save your money from downturns in the market. An annuity is a contract between you and an insurance company. You agree to contribute a set amount of money and to now withdraw it for a certain period of time. In exchange, the insurance company agrees to protect your principal and provide you with a reasonable rate of return over time.
Different Types of Annuities
There are various types of annuities, which have different options to choose from. Although an FIA gains interest based on an index, it isn’t tied directly to the market. A variable annuity is, however. To clarify, an FIA may have a guaranteed minimum interest rate, no matter what’s happening in the market. It also, however, protects your principal balance even if the market is down. For this reason, an FIA is less risky than a variable annuity. Variable annuities are tied to the stock market and therefore come with greater risk. Unlike either of these options, a fixed annuity doesn’t offer any increases in its interest rate. Instead, the contract indicates a specific interest you gain, that remains the rate for the whole term of the agreement.
The exact terms and conditions of an annuity contract vary, depending on the product and company you choose to work with. The overall concept, however, is usually the same. FIAs allow protection of your money when the stock market is down, and a reasonable rate of return, over time, when the market is up. For many people, an FIA is a win-win situation.
Learn About Your Options
At Cornerstone Wealth Management, we want retirees to learn as much as they can about their different retirement options. We offer complimentary dinner seminars on various retirement topics, including protecting your money during a recession. Contact us to register for one of these events.