Protected Growth Strategies Versus Market Risk

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.

Thomas J. Brock, CFA®, CPAInvestment, 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.

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.