How do annuities protect against market downturns?

Annuities protect against market downturns primarily because they offer consistent returns or minimum guarantees. This characteristic is fundamental to many types of annuities, especially fixed and indexed annuities. They generally provide a stable income stream and protect the investor's principal from significant losses that can occur during volatile market conditions.

For example, with a fixed annuity, the insurer typically guarantees a minimum interest rate that assures the investor will receive a certain return, regardless of market performance. In the case of indexed annuities, while they may be tied to a market index, they also come with a minimum guaranteed return to provide some level of return even in poor market conditions. This combination of consistent returns and guarantees allows investors to feel more secure about their long-term financial planning, particularly as they approach retirement, when preserving capital becomes a priority.

This protective feature of annuities contrasts with other investment options that are directly exposed to market fluctuations, making them inherently riskier during downturns.