Protected Growth Strategies Versus Market Risk

Discover the smart way to navigate investment risks and secure your financial future with a balanced approach. While direct investing offers full exposure to market fluctuations, savvy retirees recognize the importance of mitigating risk. Enter fixed index annuities—an innovative solution providing principal protection during market downturns while still offering potential gains.

Ken Orenstein, FRC
  • Written By
    Ken Orenstein, FRC

    Ken Orenstein, FRC

    Federal Retirement Advisor

    Ken Orenstein is a Federal Retirement Advisor and principal advisor for Brokerage Consulting. With expertise in investments, retirement planning, financial planning, Medicare, employee benefits and life insurance, Ken brings a wealth of knowledge and experience to his role. His educational background includes a Bachelor of Science in Management from Kean University. Ken is dedicated to providing personalized and informed advice to his clients, helping them make well-informed decisions to achieve their financial goals.

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  • Edited By
    Michael Santiago
    Headshot of Michael Santiago, senior editor for

    Michael Santiago

    Senior Financial Editor

    Michael Santiago is a skilled writer and editor with over a decade of experience in various industries. As a senior financial editor, he collaborates with a team of experts to develop compelling and accurate content.

    Read More
  • Financially Reviewed By
    Thomas J. Brock, CFA®, CPA
    headshot of Thomas J. Brock, CFA, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Professional

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

    Read More
  • Updated: April 30, 2024
  • 3 min read time

Key Takeaways

  • Investors bear full gain or loss responsibility when buying stocks, mutual funds or ETFs.
  • Pre and post-retirees prioritize reducing stock market risk in their retirement savings.
  • Fixed index annuities shield principal and gains during market downturns, offering stability in retirement planning.

Investing wisely requires striking a balance between growth potential and risk mitigation, especially for retirees safeguarding their financial future. While direct investing offers full exposure to market fluctuations, fixed index annuities provide a compelling alternative, promising principal protection alongside the potential for gains. Let’s delve into the intricacies of these investment strategies to uncover the most prudent approach for securing your retirement savings.

Understanding Investment Risks and Strategies

When an individual purchases a stock, mutual fund or exchange traded fund (EFT), they are participating 100% in the success or failure of that asset, and they will obtain the full gain or loss associated with the above mentioned transaction. A large number of pre and post retirees recognize the prudence of removing some degree of stock market risk from their retirement savings.

Direct Investing: Full Exposure to Market Fluctuations

In a fixed index annuity, the contract holder’s principal is not directly invested into an equity instrument or index, such as the S&P 500, but rather the annuity issuer will use that index as a benchmark to determine how much growth or interest to credit to the customer’s account. When the index is positive, a portion of that gain will be credited to the annuity holder’s accumulation account, when the market and indices are negative, the customer does not experience any loss due to negative stock market conditions.

Most people need to have a healthy allocation of equities in their investment portfolio. This asset class is the growth engine that enables the long-term accumulation of wealth and mitigates against inflation risk. Fixed index annuities are not an adequate replacement for equities. That said, depending on the interest rate environment, they can be a good substitute for investment grade bonds.

Risk Management in Retirement Planning

It is important to realize that the annuity holder will only get a portion of the index gains due to positive stock market conditions, usually in the range of 4% to 6%, but conversely, and perhaps more importantly, the contract holder’s principal and previously earned gains will be completely protected during the years of negative conditions and stock market declines.

The author drew upon personal experience in basic budgeting, income and retirement planning to craft this article, omitting formal references or footnotes.

What are the advantages of direct investing over other investment strategies?

Direct investing allows individuals to have full control and ownership of their assets, potentially leading to higher returns if the investments perform well.

How do fixed index annuities differ from traditional investment vehicles like stocks or mutual funds?

Fixed index annuities offer principal protection during market downturns while still allowing for potential gains based on the performance of a selected index, providing a more conservative approach to investing.

What factors should retirees consider when deciding between direct investing and fixed index annuities for their retirement savings?

Retirees should weigh the potential for higher returns against the desire for principal protection and stability in their retirement income. Factors such as risk tolerance, financial goals and time horizon should also be considered in making this decision.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: April 30, 2024
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