Indexed Annuity Perspective

Anyone who has never owned an indexed annuity has no idea whether it will work out to be a good investment. Safety and a reasonable amount of liquidity are guaranteed but top line growth is only a projection. If you have a good contract, low performance is not usually the fault of the annuity, rather it is the fault of poor economic conditions or stock market performance. Right now the S&P 500 is about flat over the past two years. If you bought an indexed annuity two years ago that hasn’t grown much then you’ve essentially kept pace with the market.

If you are patient with an indexed annuity then you are likely to hit a nice yield that makes up for a couple years of low performance. Not too long ago, I saw one that hit 15% in its fourth year to bring the average well above the initial expectations. Still, some people bail after just a couple years and take the hit on surrender fees, thinking they can do better elsewhere.  It’s all a matter of perspective and you have to remember the reasons for buying it in the first place. 

A few weeks ago I spoke with one guy with whom I’ve had several detailed conversations in the past four years.  He’s never done any business with me but just before we met he had put $100K into an indexed annuity from Prudential.  He bought it sometime in 2018 when we previously had really good rates on annuities.  I didn’t sell him the contract but it had good rates and has done well over the years.

During our last conversation he complained that the index annuity only made $700 last year.  I mentioned that making money last year was hard with any asset and positive movement was a good thing no matter how much.  He wasn’t satisfied with that answer so I asked him how the rest of his portfolio did.  Both stocks and bonds had a rough year but his asset manager had mitigated losses so the total portfolio was down less than 10%.  Even with good management a significant amount of assets was lost.

Focusing again on the annuity I asked what the total value of the contract is today.  At anniversary the contract value was $127,000 so he had made about 27% total in four years with no risk and no fees.  What’s wrong with that?  Consider the fact that in the past four years we’ve basically had two good years and two bad years.  A market like that is perfect for an indexed annuity but it takes the right perspective to see it.

For comparison purposes, let’s also consider what the S&P 500 did over the same time period.  Using approximate dates, had he put the same $100K in an index fund he would have a total value of $129,000.  The low point would have been about $80K in 2020 and the high point would have been about $140K early last year.  With the ups and downs, the indexed annuity had basically done just as well as an investment with 100% risk in the stock market.  The annuity probably edges higher because he bought it with after tax money.  He gets tax deferral from the annuity but an investment in the S&P 500 would have produced 1099s every year, even if it’s down in value.

It’s all about indexed annuity perspective.  This part of the conversation started because he’s thinking about buying another annuity but mentioned there was no good reason to buy one if the market isn’t going to do that well in the next few years.  Both he and his broker agree that it’s going to be a bumpy ride.  My first question to him is, if that’s true, why do you have the rest of your money in the market?  In times past the most volatile markets produced nice yields for indexed annuities.  It’s the result of how the contract functions.  This was especially true during the lost decade from 2001 to 2010.  If we have a similar experience for the next ten years, the rates you can get today will deliver excellent results with an annuity.

This goes back to something I said in a previous podcast.  I’ve been doing this for 20 years and this holds true for the entirety.  When annuities are at their best, very few people want them.  Really good rates will allow you to settle into an uncertain future with sleep-at-night safety and plenty of upside potential.  We will probably see the best rates available through the first quarter of this year, then I expect it to settle at least somewhat.  Do what you want with that information and give me a call if you want to talk it over.

Podcast about Indexed Annuity Perspective

What You’ll Learn from This Episode:

[1:55] Index Annuity Perspective

[3:14] Is an Index Annuity a Good Investment?

[3:57] Low Performance is not a Fault of the Annuity, but a Result of Economic Conditions

[4:54] Old Index Annuities can still Grow

[5:52] Keep Things in Perspective

[8:19] The Result of Buying an Annuity is Usually Dependent on External Forces, not the Annuity itself

[10:20] What Would You Do with Money in Stocks?

[10:45] The Most Volatile Markets Offer the Best Deals for Annuities


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Last Updated on February 6, 2024 by Bryan Anderson