Markets are swinging wildly on Mideast tensions. Here’s why advisors say guaranteed income products deserve a closer look right now.
Launched on February 28, the Iran conflict is gathering steam and showing few signs of tapering off. In the ensuing weeks, U.S. and Israeli forces have struck approximately 6,000 targets, including key military sites, nuclear facilities, oil refineries, and storage depots.
Altogether, that scenario spells trouble for the global financial markets, especially with stocks and commodities.
A case in point. The benchmark S&P 500 index has slid almost 3% since the U.S. and Israel deposed the Iranian leadership regime. Meanwhile, the CBOE Volatility Index, better known as the VIX, broke the 30 level for the first time in almost a year, signaling rising instability in the stock market over the Mideast conflict.
One potentially safe landing spot for investors comes from the annuities market. That’s because when stocks swing wildly, oil prices jump, and investor nerves fray, annuities do not react to headlines. They just keep paying.
“Annuities, by definition, will continue to provide for your cost of living despite any news headlines that may negatively impact the value of your investment portfolio,” said Tricia Wu, a portfolio manager at Leith Wheeler Investment Counsel.
Wu noted that market volatility tends to increase during periods of uncertainty. “Consequently, having some stability from your annuity payments reduces the need to sell down your investment portfolio for living expenses during an inopportune time, when valuations are depressed, and volatility is heightened,” she said. “
What Investors Need To Know Now
That annuity “safety” message resonates at a moment when many investors, especially retirees and near-retirees, are looking less for big upside and more for steady income they can count on.
Here’s what’s happening with annuities during the Iran conflict and what investors need to know as geopolitics roil the financial markets.
Why Annuities Don’t Flinch When Markets Do
Annuities can be a calming addition to an overall investment portfolio during times of market strife.
“The predictable income generated by annuities often provides a psychological benefit by allowing investors to hold through stock and interest rate volatility that might otherwise induce rash decisions with long-term negative consequences,” said William Connor, a financial planner and partner at SAX Wealth Advisor. “This is the proverbial “throwing in the towel” when the mental anguish of losses is simply too steep for an investor to maintain their investments in periods of stress.”
Not All Annuities Are Created Equal
In times of high market volatility, some annuities are more effective than others.
“There is some basis to the argument that annuities can offer security in uncertain environments; however, the assertion is typically overly simplified,” said Evan H. Farr, a certified elder law attorney and retirement planner at Farr Law Firm. “Yet the extent to which an annuity provides security to a portfolio is heavily dependent upon the specific type of annuity and the manner in which it is incorporated into a larger financial plan.”
Fixed annuities offer a set return, which can be advantageous during chaotic times. “Yet variable annuities do not necessarily have this advantage because they are based on investments that are driven by the market, which may experience a downturn during uncertain periods,” said Randy E. Beavers, a finance professor at the University of Northern Alabama.
Other caveats are in play, too. For example, fixed annuities may not offer the best protection when there’s potential for an inflation hike. “That’s what we may experience as a result of the Iran conflict,” Wu said.
The Insurance Company Bears the Risk; You Don’t
Fixed annuities and immediate income annuities offer a contractual right to receive periodic income that will never fluctuate as a result of activity within the global stock market.
“Once payments commence, regardless of the events unfolding globally (geopolitical conflicts and recessions, for example), the payments will continue without interruption,” Farr said.
The contractual obligation that creates this level of stability is that the insurance company absorbs all investment risk. “When the insurance company issues an annuity contract, it commits itself to providing a pre-determined income stream to the policyholder and removes the associated risk from the annuitant’s investment portfolio,” Farr noted. “While annuities can provide a level of stability, it is important to note that only certain types of annuities remove the associated risks with investing in the stock market.”
The Risk: Inflation and Locked-In Terms
While annuities are a useful and reliable asset during periods of market chaos, financial experts say they can introduce some investment risk. The main challenges include inflation and a lack of flexibility.
“A fixed annuity that supports your lifestyle today may fall short in just a few years if inflation accelerates,” Wu said.
Many annuitants experienced this scenario after COVID, when inflation spiked in 2022/2023, quickly eroding purchasing power. “When this happens, you either need to adjust your lifestyle (by not doing some of the fun things you enjoy doing), withdraw more from your annuity (incurring a penalty), or tap into your investment portfolio,” Wu noted. “Inflation‑linked annuities can help, but they also can be expensive.”
Additionally, annuity payments share traits with bond interest payments in that they offer investors a predictable income stream. “However, once you buy an annuity, you’ve given up flexibility,” Wu added. “Unlike bonds, you can’t rebalance your portfolio during equity downturns when valuation becomes more attractive.”
How To Build Annuities Into a Broader Retirement Plan
Most financial planners view annuities as one element of a diverse retirement strategy.
“By combining a portion of a retiree’s portfolio dedicated to providing guaranteed income with a portion invested in growth-oriented investments, retirees can fund their essential expenses while simultaneously preserving a pool of assets that will increase in value and help offset inflation over time,” Farr said.
As market volatility increases, the attractiveness of annuities typically rises as well, as investors place greater emphasis on predictability.
“However, decisions regarding the incorporation of annuities into a retirement portfolio should be made solely on the basis of the individual’s long-term retirement goals and plans, rather than on short-term fears of the stock market,” Farr added.
