Timing an Annuity Purchase
This has been a common concern for lots of people over the years. Why buy an index annuity when the market is high? It may be better to wait until there’s a market correction so you have a better chance of a big yield in the first year. It’s the same idea as buying the dip when trading in the stock market; buy low and sell high.
I can tell you from my experience of watching hundreds of contracts over several years that it will all average out in the end, but I still understand why people want to do it. If this is your plan then there are a couple things to keep in mind. I mean, if you know the market is going to drop further and then rebound, why would you buy an annuity at all?
Once again, annuities are meant to eliminate risk. Just what type of risk you want to eliminate is up to you. Protecting principal and producing maximum returns is difficult for an annuity to do all by itself. I’ve never been a proponent of that, as shown in the most recent podcast and the newsletter last week. Even so, if you want to game the system then it pays to at least know the rules.
First is, how much do you want the market to drop? Recently, the S&P 500 has been down by about 10% for the year. Is that enough? Do you want a bigger correction? I don’t ever want anyone to feel financial pain so I try to be fair to both sides. Picking the bottom is no easier than picking the top. Eliminating volatility will give way to bigger yields in the long run by requiring less yield for a recovery. In a long-term annuity contract, there will be plenty of times when the market drops and you don’t lose money, along with several times when you capture a nice yield and lock it in. Will one single year really make the difference?
Second reason is there are several options for getting a positive yield even when the broad stock market drops. Every contract has a fixed rate account that is much higher than what you will get if you’re currently sitting in cash. You can take the fixed rate for the first year, substantially increase yield on a guaranteed basis, and enter the equity indexes in the second year. That’s a solution if you think the market will drop further but you don’t know when.
Also, there are several bond indexes you can track that move with interest rates and not the stock market. It may not be a great idea with rates on the rise but there are several opportunities when the market corrects and interest rates drop as well. This is a situation where you would have an index that climbs in value even when the market drops. This was no more evident than in calendar year 2020 when the market crashed and the rush to safety dropped interest rates dramatically. Many times the two move inversely so simply picking the right side of the trade will give you a gain no matter what.
There are in addition several contracts that offer options for both gold, real estate and a bet on the market dropping. Both gold and real estate move independently from the market and being able to get positive interest when the stock market is down gives you another way to play the right contract for positive benefit.
The third and final reason is that you have to watch the index and not the overall stock market. If you have decided on a contract, it will contain a certain number of index options, where you can allocate a percentage of funds to each. Many of the indexes available today are risk controlled to limit volatility. There are several reasons why an insurance company does this but the critical point is that none of these reflects the exact movement of the stock market. Some move more and some move less. Watch the index you want to track and not the overall market. If certain conditions exist, some indexes will be positive when the stock market is negative. It doesn’t happen all the time but it does happen. Bottom line: if you want to buy low and sell high, you had better know what you’re buying.
Timing an annuity purchase is just fine. I’m all about giving people what they want. But you have to consider all the factors if you really want to outthink the situation. Timing happens inherently with an index annuity and I’m here to help if you want to find ways to do it even better. Just don’t overthink it if your goal is really to protect assets. Maximum yield comes with risk and index annuities are meant to fall a bit short of yield and come without risk. Keep in mind your reasons for doing it in the first place.
The podcast coming out next Thursday will have a slightly different take and some visual aids that illustrate indexes that will do all of the above. Check it out on YouTube.
Enjoy your weekend!