Index Annuity Performance from the Past Year

At times it seems as though everyone talks about yield as if they are able to get the highest possible growth from every asset they own.  I’ll admit that may just be my perspective because it often comes in the context of my recommendation to use an annuity to reduce risk without sacrificing growth potential.  It’s in situations like these where people tend to over analyze the growth prospects of the annuity and think the opportunity may be too good to be true; or that it’s not quite good enough.

The past year perfectly illustrates the value of index annuities, especially in terms of retirees who don’t want or can’t afford to lose money.  There are two reasons; first, interest rates went up and came back down and second, the S&P 500 dumped last fall and climbed back to reach a record high as of Friday, July 12.

I’ll get back to why these two points are critical for retirees but first I want to talk about how two contracts performed over the past year.  Each of these contracts reset and locked gains in the past week.  It is fresh in my mind after talking to both clients about allocating index options for the next year so I will focus on these two alone.

As of this writing, the S&P 500 is up about 6.2% which is a nice result from the year if you consider what the annual chart looks like.  Neither contract beat the market but considering how the S&P 500 got here, the ride to the end result was much less stressful and more beneficial in terms of most retirement applications.  I’ll explain each very generally since a detailed report for either would be extremely long.  It’s the overall idea that’s important anyway.

The first contract from Midland National was split evenly between four indices.  The DJIA, S&P 500, Euro Stoxx 50 and the Hang Seng all returned positive growth for the year but the US-based indices did much better in the rebound than did the European or Chinese markets.  The equal blend of the four was meant to offer some sort of global diversification in yield potential.  While the international exchanges muted the returns a bit, the long-term potential of such a strategy suggests the type of balance that is appropriate for consistent returns for the year.  All in all, the 4.1% blended yield across the entire contract is what I would consider to be quite reasonable given all the political and economic turmoil and uncertainty.

The second contract from Great American Life did a fair bit better being divided among three different indices.  Half of the funds were allocated to the S&P 500 while the remaining half was split between the S&P US Real Estate and SPDR Gold Shares indices.  Real estate across the US stayed strong and the rally in Gold over the past six months brought the total contract yield to nearly 5.2% for the year.  I recall that a year ago there was plenty of market uncertainty so initially we allocated to a couple indices that could move in a positive direction regardless of the stock market.  Several different economic indicators are needed to explain why either gold or real estate can move inversely to the stock market but that’s worthy of a white paper all its own.  Suffice it to say, yield on the contract is very acceptable and creates optimism for this annuity to work out as illustrated from the beginning.

As I said before, yield is only a small part of the equation.  Growth is nice but far from the only reason to use an index annuity in retirement planning.  I mentioned in the second paragraph I would dive into the two most valuable features of index annuities and how that was illustrated by the events of the past year. 

Rates rose meaningfully for the first time in several years.  This caused a decrease in bond values that was erased over the past few months as treasury rates fell back to some of the lowest levels since 2015.  It represents the type of short-term risk to portfolio values that many don’t consider.  Aside from this, rates in general have stayed low, regardless of 2018 increases and it is still hard to identify opportunities with an acceptable combination of safety and yield.

Although US stock markets rebounded to finish the past year solidly positive, you can’t discount the affect that October and December 2018 had on the psyche of the average individual with assets exposed to daily fluctuations.  Just because it is back up does not mean it’s going to stay up.  Each of the annuities I mentioned locked in the gains made last year and will never lose value.  If the market corrects all funds are protected but if it keeps going both will continue to grow.

Both interest rate and market risk are compounded during retirement because consistent withdrawals are needed to fund a stable lifestyle.  Interest and dividends are not enough to cover the income gap for most people with the typical stocks and bonds portfolio.  If consistent withdrawals are taken when rates are rising and markets are falling you will be liquidating assets below top value which, over time, will have an exponentially negative effect on total portfolio value.  These two events happened in conjunction last fall when rates spiked to a five-year high in December on the heels of a 15% decline in the S&P 500.

To have an asset with enough liquidity free of interest rate risk is the solution to maintaining maximum growth potential while using a portfolio for income in retirement.  The numbers prove it and the long-term effect is dramatically more positive than any other strategy.

As a disclaimer, I need to remind anyone who has an objection that I could write an entire paper on any of the paragraphs above.  There are far too many contingencies to explain them all without making this post 20 pages.  I don’t have the time to do that every week so if you’d like an explanation of the details I’ll reserve that for individual meetings so I can show you exactly how it can benefit your situation.

All my best,

Bryan

800.438.5121

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