Timing is a deciding factor for a lot of people. Interest rates and stock market performance keep people locked in to current holdings and nervous about making changes. If rates were higher many would find it easier to shift toward protecting assets. Instead there are those who hang on to old habits and currently have more risk than they should.
As often as I hear from someone who is waiting for rates to rise I also hear people say they are waiting for the market to correct before buying an annuity. I get it. Why buy a contract with growth potential tied to the stock market when the market is at an all-time high? Asset protection is one thing but everyone seems to be focused on yield.
From a mechanics perspective there is one feature of index annuities that mitigates the risk of no earnings when the market is down. If the market drops you don’t lose money and the next year you get to start the crediting period from the new low point, giving you the opportunity for enhanced yields after being protected from loss. After all, the point of a good investment is to have a nice average, not just one year when you do really well.
But that’s not enough for some people so I thought it would be a good time to point out a few ways an index annuity will grow no matter what happens with the stock market. One way is available with all contracts and the others are only available in select contracts. The best options have a little of all three so there is always opportunity for growth, regardless of market conditions.
First is the fixed rate option that all contracts have. One of the allocation options you have is to place funds into an interest bearing account so if you think the market is overvalued you can get a guaranteed interest rate for one year. You make money no matter what happens in the market and at contract anniversary you can change the allocation to chase growth with market options if you are optimistic and want more potential.
It’s a good option for treading water, giving you a reasonable yield for one year. Currently fixed rates are close to 3% so it meets or exceeds safe yields on CDs and money market funds. Sure the contract requires a longer commitment but after you bank the interest it’s your choice whether to take guaranteed interest for a second year or chase more yield in one of the market-based index options. Every year you get to choose.
Second, alternative indices are available in some contracts that allow for growth not tied to the market. Two of the more common options I use are real estate and gold bullion indices that provide positive movement that can either precede or follow market growth or decline. As the market has been more volatile over the past couple years, U.S. real estate has continued a steady recovery from a bottom more than ten years ago so annual yields have beaten the S&P 500 in several years since. Gold has been mostly flat for the past few years but I expect it to provide a safe haven for investors if the economy falters and the stock market reacts negatively.
The final option is less common but not unknown. It’s called an Inverse Performance Trigger option. Essentially it gives you an interest credit if the chosen index stays flat or drops in value. Just like you can make a bet on the market going up you can make a bet on it going down. In one of the better contracts I frequently recommend, the insurance company will credit your account with 6.95% if the S&P 500 stays even or drops by any amount by the end of the contract year. For anyone who insists the market is doomed in the near-term you have the chance at a decent payoff with no risk if you predict correctly.
More important than excessive growth potential is consistent performance with any contract. I get tired of the new indices and outrageous participation rates that some agents suggest are built to create yields you can only dream about. But I’ll tell you from experience that simple contracts with various index options and believable crediting terms will always win in the long run. Consistency produces the best results.
Most explanations of index annuities use general examples and illustrations regularly use the S&P 500 to show performance potential. It’s easy to do because the S&P 500 is widely understood and followed. But that doesn’t mean it’s the only thing available or that tracking just that index will produce the best results. Having hedges available that allow for growth during volatile market periods is one of the keys to finding the best contracts to use. A variety of indices gives you diversification of opportunity and long-term yields will be more favorable if you have more ways to earn interest. If you blend the allocation so yield potential comes in every scenario you’ll find the kind of performance that makes the safe part of your portfolio work well throughout retirement.