If we learned anything in the year 2020, it was that anything that can happen. So then, what can you do to be prepared? For starters, you can learn how to protect your money during a recession.
What Happens During a Recession
A recession is when real Gross Domestic Product (GDP) drops for 2 quarters or more, back to back. This causes a few things. In a recession, household incomes are down and unemployment is high. Consumer spending is low, and the stock market typically drops. Many investors even pull their money out of the market entirely. Businesses may begin to lose money, and then have to lay off workers. As if this wasn’t enough, low employment generally causes people to spend less money. Therefore, there’s less money flowing through the economy. For many people, a recession can lead to feelings of uncertainty.
No one can predict exactly what the stock market will do at any given time. However, we can use history to give us some indication as to what could happen. Overall, a recession will usually cause a stock market drop. If you have your retirement accounts invested in the stock market during a recession, you could lose money. Doing this while you’re still working could be okay, but a stock market crash when you’re nearing or in retirement may not be a risk you want to take. Thankfully, there are ways to protect your money during a recession.
Fixed indexed annuities (FIAs) are a product you may be able to use to protect 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 not withdraw it for a certain period of time. In return, the insurance company agrees to protect your principal amount and provide you with a reasonable rate of return, over time.
Different Types of Annuities
There are various types of annuities, with various options to choose from. An FIA accumulates interest based on an index and isn’t tied to the stock market. An FIA may have a guaranteed minimum interest rate, no matter what the market is doing. It also protects the principal balance, even if the market goes down. A variable annuity, on the other hand, is tied directly to the market and therefore comes with higher risk. A fixed annuity doesn’t offer an increase in its interest rate, unlike the other two types. Instead, the contract indicates a specific interest rate you receive, and it remains the same for the term of the agreement.
The exact terms and conditions of an agreement vary, depending on the product and the company you choose to work with. The overall concept, however, is the same. An FIA may allow you to see a reasonable rate of return when the market is up, while still protecting your money when the market is down. To some, an FIA is a win-win situation.
Learn About Your Options
At Messina Wealth Management, we believe retirees should learn as much as possible about their retirement options. For this reason, we offer complimentary dinner seminars and insurance presentations where we discuss various topics, including how to protect your hard-earned money during retirement. Contact us to register for one of these educational events.