What happens to my indexed annuity if the market goes down? This question gets to the heart of why fixed indexed annuities exist in the first place. In most cases, an indexed annuity does not lose value because the market index used for crediting is negative. Instead, the contract typically credits zero interest for that measuring period rather than posting a negative return. Said differently: when the market is down, the indexed annuity usually “sits still” on interest crediting—your previously credited value stays in place, and the contract waits for the next positive index cycle to credit new interest.

That principal protection feature is the headline advantage, but it’s important to be precise about what it does and does not protect you from. An indexed annuity is an insurance contract, not a brokerage account. The index is used as a reference point for calculating potential interest credits, not as an investment you own. That’s why you generally don’t see your account value drop due to negative index performance. However, your contract value can still be reduced by non-market factors, such as withdrawals above free withdrawal limits, surrender charges if you exit early, rider fees if you added optional benefits, and taxes depending on how funds are distributed. Those changes are contract-usage outcomes—not market-loss outcomes—and understanding the difference is the key to avoiding surprises.

For investors who have lived through real market declines, or for retirees who are within a few years of drawing income, this “no down market posting” characteristic can fundamentally change retirement planning. When a portfolio drops and you also need withdrawals, the combination of losses plus spending can permanently weaken the plan. Indexed annuities are often used to remove that specific stress point for a portion of assets: the protected portion is not forced to recover from an index-driven loss, and that can reduce pressure on the rest of the household strategy.

If you’re beginning your research, it helps to understand the most common protection foundations and how different contracts incorporate guarantees and renewal mechanics. A good starting point is reviewing fixed indexed annuity structures with guaranteed crediting components, because once you understand the protection floor and what is actually guaranteed, you can evaluate upside potential and income features with realistic expectations.

1) The “Down Market” Reality: Most Indexed Annuities Credit 0% for That Period

The defining feature of most indexed annuities is the floor. In many contracts, the crediting floor is zero percent for the chosen index strategy. When the index performance over the measuring period is negative, you typically receive a 0% credit rather than a negative return. That’s why your account value generally does not go down due to market declines. Your contract isn’t “tracking” the market like an investment account. It’s applying a crediting formula that blocks negative credits.

This is often described as a “stair-step” pattern. In years (or periods) where the index is positive, you may earn an interest credit based on the contract’s rules. In years where the index is negative, you earn zero for that period, and your account value remains at the last credited level (before any withdrawals or fees). Over time, this can create a smoother ride compared to direct market exposure, which may be especially important if your retirement plan relies on stability rather than maximum upside capture.

That said, “0%” can feel emotionally strange at first. Some people interpret it as “nothing happened,” but in the context of a down market, zero is preservation. If a traditional investment portfolio is down 20% and your annuity is flat, the gap between “flat” and “down” is the entire reason the product exists. It’s not that you are winning every year; it’s that you are reducing the odds that a market downturn forces a painful planning change.

2) Why Your Indexed Annuity Statement Usually Won’t Show a Market Loss

When markets fall, investors in stocks and mutual funds see their account value decline immediately. That daily repricing is the nature of market investments. Indexed annuities generally do not reprice your account value daily based on index moves. Instead, the index is observed according to the strategy’s measuring schedule, and the contract credits interest (or credits zero) at the end of that term. Because the contract does not post negative credits for the index strategy, your statement typically does not reflect a market loss.

This design can also reduce behavioral mistakes. In down markets, many investors sell at the wrong time, then wait too long to reinvest, locking in losses. A protected contract that doesn’t visibly decline can remove the “panic trigger” that causes those mistakes. That doesn’t mean it removes risk from the entire retirement plan, but it can reduce the chance that a portion of the plan gets derailed by emotional decision-making.

However, it’s important to keep the mental model correct: the annuity isn’t “beating” the market in down years because it has special insight. It is simply built so that negative index movement does not reduce credited value. You are trading some upside capacity in good markets for protection in bad ones.

3) What Happens Next: How the Contract Participates When Markets Recover

After a downturn, markets usually recover at some point—but the path can be unpredictable. In a direct investment portfolio, you participate fully in the recovery (for better or worse). In an indexed annuity, participation is governed by the crediting rules: caps, participation rates, spreads, or other formula components. In other words, once markets recover, your annuity can credit interest again, but the amount credited will be shaped by the contract’s limitations.

That is the “other half” of the story. The annuity avoids losses in down periods, but it also usually does not capture the full rebound the way a market portfolio can. The buyer’s question is whether the overall ride—less downside, managed upside—produces a planning outcome that feels better and more sustainable than full volatility exposure, especially when withdrawals and income timing are part of the equation.

Because different products apply different crediting rules, it’s common for consumers to compare multiple contracts rather than relying on a single illustration. If you want a high-level snapshot of the environment that influences caps and crediting competitiveness, reviewing best annuity rate environments can help contextualize why “today’s” terms can look different from “last year’s” terms, and why renewal terms matter over time.

4) The Most Important Retirement Risk in Down Markets: Sequence of Returns

Market downturns matter most when you are withdrawing. That’s sequence-of-returns risk: the order of returns matters when money is leaving the portfolio. A retiree who experiences a severe decline early in retirement and simultaneously takes withdrawals can permanently weaken the plan—even if average returns over the long run are fine. The plan can run out of money sooner because the withdrawals are coming from a shrunken base.

Indexed annuities can mitigate that specific risk for the portion of assets allocated to the annuity. If the market is down, the annuity is not down due to index performance, so the retiree can potentially draw from protected sources rather than selling depressed investments. Even if the annuity is crediting 0% during the downturn, the “not down” attribute can be strategically useful in an income plan.

This is also why indexed annuities are frequently discussed in the same breath as lifetime income tools. Some households want protected accumulation; others want contractual income; many want a blend. If you’re weighing income certainty against flexibility and liquidity, it can help to understand tradeoffs discussed in disadvantages of a lifetime income annuity, because it highlights why some retirees prefer partial guarantees rather than an all-in irrevocable income commitment.

5) The “Floor” Protects Against Market Loss, But It Doesn’t Eliminate Every Way Value Can Decline

Here is the nuance that many buyers miss: your indexed annuity generally won’t lose value because the market index is down, but your contract value can still be reduced by contract usage. If you take withdrawals, your account value goes down because you took money out. If you withdraw more than allowed during the surrender period, you may pay surrender charges that reduce what you receive. If you added optional riders with fees, those fees may be deducted and can reduce net accumulation. And taxes can reduce what you keep when earnings are distributed.

That’s why the best answer to “What happens if the market goes down?” is: the market decline itself usually does not reduce contract value, but you still have to manage the contract responsibly. The annuity is a long-term tool. It behaves best when the timeline, liquidity needs, and income objectives are aligned with the contract’s rules.

6) Withdrawals During a Down Market: Why “Protected Value” Can Reduce Pressure on the Rest of the Plan

A practical way to think about down markets is not just “what happens to my account value,” but “what does the down market force me to do?” In a traditional investment portfolio, a downturn can force you to choose between selling at a loss, reducing spending, or taking risk elsewhere. When a portion of your assets is protected from market loss, you may have more flexibility. You can choose to pull from protected sources for a period, potentially giving growth assets time to recover.

This doesn’t mean you should drain the annuity without a plan. It means the annuity can function as a stabilizer—especially when your goal is to reduce the chance that a bear market creates a permanent plan impairment.

Many people approach this by assigning “jobs” to different accounts: liquid cash for near-term needs, protected annuity values for stability, and growth assets for longer-term appreciation and inflation protection. The best outcomes tend to happen when the annuity is sized appropriately for its job, not oversized to the point that liquidity becomes a problem.

7) Does Your “Income Base” Keep Growing Even If the Market Is Down?

If your indexed annuity includes an optional income rider, there may be a second ledger value used to calculate future income. This is often called an income base or benefit base. In some designs, the income base can increase based on rider rules (for example, a roll-up rate, bonus credits, or other formula) even when the index crediting for the account value is 0% during a down period. That can create a useful planning effect: the market is down, your account value is stable due to the floor, and your future income calculation value may still be progressing depending on rider terms.

But this feature can also be misunderstood. The income base is typically not a cash value you can withdraw as a lump sum. It’s a calculation value used to determine lifetime withdrawals. If you conflate the income base with the account value, you can develop unrealistic expectations about liquidity or accumulation. This is why annuity comparisons should always show both values clearly and explain what each one does.

8) The “Bad Year” May Be a Non-Event in Value—But the Cost of Waiting Is Opportunity Cost

When the market goes down, the indexed annuity’s account value may be stable. That feels good. The hidden tradeoff is what happens when the market rebounds sharply. If the rebound is strong, a capped strategy may credit only part of that growth. The annuity may still deliver a solid outcome across a volatile cycle, but it will rarely match full equity exposure in the strongest bull runs.

This isn’t a flaw. It’s the price of protection. The real question is: are you the type of investor who will actually remain fully invested through a downturn and capture the rebound? If yes, the opportunity cost matters. If no—if your behavior tends to shift toward cash at the wrong time—then the annuity may produce a better real-world result even if a spreadsheet comparison suggests otherwise.

9) Insurance Company Strength Matters More When You Rely on Guarantees

When markets fall, you’re leaning on the contract floor and the insurer’s promise to follow the crediting rules. That’s why insurance company strength matters. You’re not relying on a stock market recovery to “fix” losses inside the annuity because, in most designs, the annuity didn’t post the loss to begin with. Instead, you’re relying on the insurer’s claims-paying ability and the contract terms.

If you want a practical overview of how many consumers interpret insurer financial strength indicators and what the most common rating framework is designed to convey, see what does an insurance company’s AM Best rating mean. Ratings are not a perfect predictor, but they are a widely used starting point when selecting long-term guarantee products.

10) Tax Deferral During Down Markets: Why Some Retirees Like the Structure

During a market downturn, one frustration in taxable investment accounts is that you may be forced to realize gains or manage taxable distributions even when the market has been unpleasant. Indexed annuities grow tax-deferred. That means the contract is not issuing annual taxable gains while you wait for better market conditions. This can be helpful for retirees who are sensitive to taxable income levels and want to control the timing of distributions.

That said, tax deferral doesn’t automatically mean “lower taxes.” Withdrawals are generally taxed as ordinary income on gains, and the sequencing of withdrawals can matter. If you want a clear explanation of how basis works and why it changes the taxation of withdrawals, see annuity cost basis planning. Understanding basis helps you plan how to use annuity dollars in the most tax-intelligent way.

11) When an Indexed Annuity Can Still Feel “Bad” in a Down Market

Even though the market decline itself typically does not reduce contract value, there are scenarios where owners still feel disappointed during down markets. One is when they expected growth every year and see 0% for a period. Another is when they expected “stock market returns” and discover the cap limits. Another is when they need liquidity, and the surrender schedule makes withdrawals expensive. The contract is working, but the fit may not be right.

This is why the “best” indexed annuity is not the one with the most impressive illustration. It’s the one that matches your timeline, liquidity needs, and income objectives. If your plan requires large withdrawals in the next few years, a long surrender schedule may not be appropriate. If you want maximum upside, you may keep more assets in growth allocations. If you want stable planning and reduced downside participation, an indexed annuity can be a strong tool.

Lifetime Income Calculator

💡 Note: The calculator accepts premiums up to $2,000,000. If you’re investing more, results increase in direct proportion — for example, doubling your premium roughly doubles the guaranteed income at the same age and options.

12) A Simple “If the Market Goes Down” Checklist

If you want a practical way to internalize what happens when the market goes down, here’s the simplest checklist. First: does the annuity credit a negative return because the index is down? In most standard indexed annuity strategies, no—the credited rate is typically 0% for that term. Second: can your value still change? Yes—withdrawals reduce account value, early surrender can cause charges, and rider fees can reduce net accumulation. Third: what happens next? When markets recover, the annuity can credit interest again, but it will be limited by caps, participation rates, or spreads depending on your strategy choices.

When you understand that sequence, you can evaluate the product without confusion. Down markets are largely “non-events” in index crediting for these contracts. The more important variable is how the contract fits into your plan: liquidity, income timing, and realistic upside expectations.

13) How Diversified Retirement Planning Uses Down-Market Protection Without Overcommitting

Many households use indexed annuities as a portion of a diversified strategy rather than an all-in replacement for equities. The objective is not to “win” every year. The objective is to prevent a severe market decline from forcing plan changes at the worst possible time. If the annuity is sized correctly, it can create stability without sacrificing the entire portfolio’s growth potential.

Because product differences matter, comparisons often look beyond one carrier. That’s where a multi-carrier review process can help: it can show how different floors, surrender terms, and rider structures behave in both good and bad market conditions. It can also show which tradeoffs are worth paying for and which are not.

If you’d like a simplified framework, the “best” indexed annuity is typically the one where you can live with the tradeoffs in multiple scenarios: years where you earn a moderate credit, years where you earn 0%, and years where the market surges and you capture only a portion of that upside. When you can live with all three scenarios, the product is doing what it’s designed to do—and it can be a powerful retirement planning tool.