What consequence might retirees face during a market downturn when relying on variable annuities?

Retirees who rely on variable annuities can experience reduced cash flow during a market downturn because the value of their investments may decrease. Variable annuities are tied to the performance of underlying investment options, such as stocks and bonds. When the market declines, the value of these investments can drop, leading to lower account values and, consequently, reduced payouts if the retirees are withdrawing funds based on the account balance.

This dynamic is critical for retirees who may depend on these funds for their living expenses. If the market performs poorly, not only might their account value diminish, but they might also have to adjust their withdrawal strategies to accommodate the decline, further impacting their cash flow. Relying on a product whose return is influenced by market performance can introduce volatility into a retiree's income, which may not be sustainable during prolonged downturns.

In contrast, options like guaranteed income levels are not applicable here, as variable annuities do not typically provide consistent, guaranteed payouts, especially when market conditions are unfavorable.