How to Beat the Market with an Annuity

This is the continuation of a video I ran a couple years ago. It represents a different way to think about annuities along with a dynamic way to plan for retirement.  Recent volatility in the stock market presents a good opportunity to revisit the idea, plus, for some reason, my video was removed from YouTube so it has to be redone.

For years I have disagreed with anyone who compares index annuities to the stock market.  Those are two very different things.  Opportunistic advisors on either side capitalize on both fear and greed to prove a point but none of us truly knows what’s going to happen.  Even if a person is right one day they could be wrong the next.

Annuities and the stock market are not one in the same but two different asset classes entirely.  For someone in the savings years of retirement there may be little justification for using an annuity.  But in retirement, when contributions are no longer being made, annuities and the stock market can work hand in hand to produce exceptional results.

There are lots of different ways to use annuities in retirement but I’m going to talk about one that almost no one ever mentions.  I stumbled across this idea several years ago while punching numbers and I really thought I had found an ingenious way to chase high yields.  It turns out, however, that the idea was the subject of extensive academic research.  It has been proven to be the best way to handle retirement assets; offering income security, inflation protection, limited volatility and maximum growth over time.  I just fell into it accidentally so it wasn’t my idea after all.

Wade Pfau was the guy who studied it and he wrote a whole book about it.  I’m trying to make sure this can be read in five minutes or less so I’ll keep it simple and stick to the numbers I originally found.  In order for someone to implement this it takes careful analysis of all assets, needs and goals.  Any given plan is too specific to the client so it doesn’t do much good for me to put out a general case study with something this complex.

No matter how annuities are used in retirement the general purpose is to protect assets and limit volatility.  Many people hesitate to use annuities because of the significant time commitment that ranges from just a few years to lifetime, depending on what a person chooses.  This hesitance has led me to look for different ways of using annuities to demonstrate the flexibility.

I will redo this video for the podcast next week so people have the support of a visual aid but for now I’m just going to explain it in simple terms.  The assumptions are below:

Let’s say you invested $100,000 in the stock market at the beginning of the worst 20 year period in market history.

Many are surprised to learn that after 20 years money would have grown and you’d have $214,365.

This represents the growth in the S&P 500 with dividends reinvested.

It’s not a bad result given the volatility present in that time period and it gives a good barometer for anyone approaching retirement now with an inflated stock market.

But, the volatility would have been extremely detrimental to an income plan and most people with modest income requirements would have gone broke.

This was based on the period in the stock market from 1927 – 1946, or the Great Depression.  Now, maybe we don’t repeat that period but it’s an excellent stress test for retirement assets.  Also, I’m going to show you the alternative below and everyone needs to know that I’ve looked at more than 40 different time periods and the results are similar across all of them.  That’s why I can claim this has been academically proven.

Here’s the alternative:

Instead of investing in the stock market, purchase an indexed annuity for $100,000.

Use the free withdrawal each year to take $5000 from the annuity and invest it incrementally into the market over time.

Aggregate investment in the market of $100K but over 20 years so risk and volatility is dramatically reduced.

Remaining stock market investment is $200,130 so you’re just a little bit behind what happened in the previous example with much less risk.

What about the annuity?  Surely it grew a little, but you only withdrew the basis.  In the podcast example I’ll use a contract that gained 3.9% over the 20 year period.  This left $49,609 remaining in the annuity account.

Total assets of $249,739 using the annuity as compared to $214,365 by carrying all the risk in the stock market.

That’s how you beat the market with an annuity.

Again, this is all going to be illustrated with a video next week in the podcast.  There are all sorts of additional considerations to make and I’ll be able to go into more detail when I’m speaking.  Remember, there was an entire book written about it, albeit from a fairly different perspective.  But the conclusions are the same.

The only thing I’ll tell you specifically is that you don’t have to buy into one idea entirely. However, any time you do things that incrementally put you in a better position for success it is a positive improvement.  Annuities are nothing to be scared of.  You just need the right strategy.

A lot of people are hesitant about buying an annuity. And the recent volatility in the stock market makes people more skeptical about how they can benefit from an annuity. Given that there’s a significant time commitment and not knowing what to do, it is even scarier to jump in. It’s you, your money, and your future against the unpredictable stock market. 

In this solo session, join Bryan Anderson as he discusses alternative options for doing annuity with lesser risk and more income potential. He also shares his insights on your advantages in the stock market for buying an annuity based on facts and his experiences. 

Podcast about How to Beat the Market with an Annuity

What You’ll Learn in This Episode:

[01:26] The recent volatility in the stock market

[03:12] Argument on the comparison between index annuities and the stock market

[04:43] Bonds will have to take a hit and asset value but it might turn around

[06:11] Academic study on annuity

[08:35] Why a lot of people hesitate to use annuities

[09:13] Explaining different ways to do annuity

[11:53] How to get out of the market’s worst case scenario with less risk

[14:12] Timing your annuity purchase in different market scenarios

[16:13] Maximizing earning potential

[20:06] Why qualified assets are important in the success of applying Brian’s annuity strategy

Key Quotes:

  • [08:30] “No matter how you use annuities and retirement, the point is to protect assets and limit volatility” 
  • [10”55] “Even if you go through the worst period in history, then you’re going to double your money.”
  • [14:03] “When the market’s really high, you got more money than you’ve ever had. Take a piece of it, use an annuity, but you can get back into the market incrementally over.”
  • [19:44] “The annuity doesn’t beat the market, but how you use it does.”


Last Updated on May 10, 2024 by Bryan Anderson