If 2020 taught us anything, it was that anything can happen. The markets are up now, but what happens when that changes? What can you do to be prepared? First, here’s how to protect your money during a recession.
What Happens During a Recession?
A recession occurs when real Gross Domestic Product (GDP) drops for 2 quarters or more, back to back. In simple terms, what does this mean? Well, firstly, household incomes are down and unemployment is high. Consumer spending is also low during a recession. The stock market also typically drops. Many investors actually pull their money out of the stock market entirely, Businesses may begin to lose money, and as a result, have to lay off more workers. As if all this wasn’t enough, low employment generally causes people to spend less money. As a result, there’s less money flowing through the economy. For some people, a recession can lead to feelings of uncertainty and instability.
The Stock Market in a Recession
No one can predict with certainty what the stock market will do at any given time. However, we can have some indication of what could happen in the market at certain times, based on history. A recession typically causes the stock market to drop. If your retirement accounts are invested in the market, and a recession occurs, you could lose money. Doing this while you’re still working may be okay, but in retirement, it’s not a risk you want to take. Thankfully, we can show you how to protect your money during a recession.
An Answer to Protecting Your Money: FIAs
Fixed indexed annuities (FIAs) are a product that may be able to help save your money from the risks of the stock 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 amount of time. In exchange, the insurance company agrees to protect your money and provide a reasonable rate of return over time.
The Differences Between Annuities
Annuities aren’t all the same. They have different options to choose from. An FIA is based on an index, but isn’t tied to the market directly, the way a variable annuity is. An FIA usually has a guaranteed minimum interest rate, no matter what’s going on in the stock market. Even if the market goes down, it protects your principal balance. For this reason, an FIA isn’t as risky as a variable annuity. Variable annuities are tied to the stock market, meaning they carry greater risk. A fixed annuity, unlike either of these options, doesn’t offer an increase in its interest rate. Instead, the contract dictates the specific interest rate you get, and that remains the rate for the term of the agreement.
The exact terms and conditions of the agreement vary, depending on the product and the company you choose to work with. The overall concept is usually the same, however. An FIA allows you to protect your money when the market is down, and earn a reasonable amount when the market is up. For many people, an FIA is a win-win situation.
Get Educated About Your Options
Here at Tower Bridge Financial, we want retirees to learn as much as possible about their retirement options. For this reason, we offer complimentary dinner seminars covering various retirement topics, including how to protect your money. Contact us or register for one of these events.