The recent volatility of the stock market, combined with financial uncertainty for many nearing or in retirement, could signal a bumpy ride down the road.

A study by the Employee Benefit Research Institute reported that only 21 percent of Americans feel “very confident” they’ll have enough money to live comfortably through retirement. Issues driving this lack of confidence include long-term care expenses, the unpredictability of stocks, reductions in pension programs and reports indicating many people are behind in retirement savings.

Adding to the concern is the fact that retirees are living longer, making dependable long-term income streams an even bigger factor. In that context, annuities are gaining interest. 

“While annuities are frequently misunderstood and not appropriate for everyone, they can have substantial benefits when used in the right situation,” said Ryan Eaglin, founder and chief advisor of America’s Annuity, a retirement planning firm in Phoenix. “That stream of guaranteed income gives you some financial consistency and predictability, which alleviates stress and concern. With plenty of concern about where stocks are headed, that can be a comfort for a lot of people.”

Eaglin listed five ways that an annuity can work as a hedge against market volatility:

1. Income guarantees. 

Because Social Security and a pension are typically not enough to cover basic expenses in retirement, many retirees must use their portfolio as an income source.
    “If all your money is invested in the market and your portfolio starts to go down, you may get nervous about whether your income source is going to last the rest of your life,” Eaglin said. “An annuity can fix this problem by providing income guarantees.”

2. Prevents a panic sell. 

Since a fixed annuity gives more stability to an overall portfolio, your portfolio will typically be less volatile. “When the markets correct, your portfolio should not decline as much,” said Eaglin. “If the annuity is providing you a guaranteed income, then you can ride out the dips knowing that your income from the annuity is enough to cover your retirement spending needs.”

3. Promotes long-term thinking. 

Declining times for a portfolio don’t necessarily mean it’s time to bail out. “With an annuity, it’s easier to commit long term to a stable portfolio as opposed to a highly volatile one,” Eaglin said.

4. Avoids market losses. 

Equities, bonds, commodities—anything you invest in can go down in price. But a fixed annuity does not. 

5. Brings more predictability. 

“Investment markets are not predictable, and we live in a world of uncertainty,” Eaglin said. “But with an annuity that can guarantee you a specific interest rate, you can know exactly what it will grow to over time.”

Annuities have some benefits that can help retirees, Eaglin said. 

“Stocks can be a great source of income, or a source of great stress, so more people are looking for streams they can count on,” he said.

For more information on annuities, contact your financial advisor or retirement professional.