Index Annuity Calculators
While some sites claim to have an Index Annuity calculator
that works, it’s not really the case.
Many people would find it easy if they could go online and calculate returns on an indexed annuity.
While some sites claim to have an Index Annuity calculator that works, it’s not really the case.
It is extremely difficult, if not impossible, to create an indexed annuity calculator that actually creates reliable numbers.
I’m going to explain why this is the case with both annuity calculators and illustrations you get from a company. The results you see can be better or worse than shown so it’s better to buy a contract for purpose rather than projection. Read more about timing your annuity purchase here.
Index Annuity Calculators Start Date: Timing is Important
Every company illustration uses the past ten market years for the performance example. Starting date is January 1st and the ending date is December 31st. All financial institutions are closed on New Year’s Day so that’s impossible.
That may sound like a picky complaint, and it is, but it’s meant as part of a bigger point. The day your contract starts is the day it finishes each year. A contract that resets in January will have noticeably different results than a contract that resets in February.
Over time it should average out to be something similar but it will be far from something you can count on. This is no reason not to buy one, rather it’s a reason why an indexed annuity calculator won’t do you much good.
Learn how indexed annuities make money.
Backtesting: Past Performance Doesn’t Indicate Future Results
Since we are always looking at past results when using an indexed annuity calculator, we have no way of knowing whether the previous ten years will repeat.
The stock market may be good or it may be bad, but one thing we know with near absolute certainty is that it won’t be the same. Fixed indexed annuities will obviously do well if the market steadily climbs. And they do quite well when the stock market is very volatile, but predicting the future is foolish.
Another issue with this is that many contracts use indexes that didn’t even exist ten years ago so the companies use a tactic called backtesting. A computer runs the index over past market scenarios in all sectors and asset classes that the index tracks.
They recreate identical market performance to the past ten years and the index’s algorithm weights and balances the index along the way to create a purely hypothetical result. I’m not sure about you but it sounds fishy to me.
If the algorithm was created to optimize index performance over a historical period then you can be assured that it won’t perform the same in a totally different environment over the next ten years.
Many popular indexes were created just a couple of years ago and use backtesting to come up with future projections.
Fear not, however, most contracts have standard indexes like the S&P 500, NASDAQ, and Dow Jones which have plenty of real historical data to analyze.
Read more about the indexes here: Crazy Annuity Indexes.
Interest Rate Changes
One of the biggest complaints from people who choose not to buy indexed annuities is that the insurance company can change rates at their discretion.
Some companies do have guaranteed cap and participation rates but, while guaranteed not to change, will start much lower than rates that are adjustable.
There are certain reasons why a company needs to be able to change rates and it’s all part of evolving market conditions. There are also some contracts that start much higher just to bait you in.
If one company has dramatically better rates then you should be expecting a downward adjustment in the first couple of years. Then your initial illustration or anything an indexed annuity calculator projected will be worthless.
I’ve done a pretty good job of choosing companies that keep rates steady throughout the life of the contract and it really does mostly depend on economic conditions.
This is not a warning sign by any means. Because index cap and participation rates are adjustable you can see them increase as well as decrease. I’ve seen both so it’s possible for a contract to work out even better than projected.
To Sum Up: Don’t Trust Index Annuity Calculators
Either way, an index annuity calculator showing you what to expect in the future will not give you anything reliable.
Buy a contract for purpose rather than projection. It’s very simple. There are far too many variables at play in a fixed indexed annuity to make a calculator that can capture it all.
Not to worry, however, the products are safe and there is plenty of growth potential so it’s still worth looking at for safe money or income in retirement. This is just how it works and my job is to tell the truth.