The Best Time to Buy an Index Annuity
Boy would I ever love it if there was a best time to buy an index annuity. Let’s say there was a three month period in the year that always produced the best returns. I’d work 18 hours a day and seven days a week then spend the other nine months fishing saltwater flats and riding the mountains of Montana and Wyoming. Sadly that doesn’t exist so it doesn’t warrant a newsletter but timing in other ways causes hesitation for lots of people.
Everyone tries to time the market whether intentionally or subconsciously. But rarely does anyone pay attention to all the indicators and make every move at the right time. Market rallies, interest rate changes, politics and dozens of other indicators all give clues but it takes an algorithm to sort it all out, and those are still wrong a lot of the time.
Not only have I heard this a bunch recently but also it has been a common theme with people hesitant to pull the trigger on an index annuity. Many times I’ve heard someone say, “this looks good but maybe I should wait until the market drops to get it.” The thinking goes that if you are using a contract with growth tied to the market then a lower starting point gives more upside potential. Buying low and selling high, right?
On the surface it makes sense but going a bit deeper, I don’t understand why anyone would want to play the market while trying to get out of the market. It’s going to go one way or the other and most of the time the result isn’t positive. Bigger money is always moving by way of faster computers and we all have no control over the day to day and year over year swings.
Did you ever think that maybe the ‘buy and hold’ mantra is promoted by institutions because they want you to stay in one place? That way they can make more money by shaving pennies off of millions of shares and thousands of transactions. It’s kind of beside the point but these things pop into my head from time to time. Try reading the book Flash Boys by Michael Lewis for a real eye-opener.
If you are thinking about trying to time the market before buying an annuity it’s not so simple. And in all honesty it doesn’t make any difference in the end. An index annuity is built to time the market. If the market drops in the first contract year then you start the second year from a lower point, giving more upside potential. What if the market doesn’t drop? Well you had less risk and probably locked in some gains.
2017 was a really good example of this. Lots and lots of people thought the market would correct and decided to sit it out in cash. The S&P 500 was up something like 23% that year so all those people who were risk averse missed out on a year where I saw plenty of double digit annuity yields. Just remember that big gains are nice but it’s all about consistency, like I wrote about last week. Hit the green button at the top to go to the main page if you missed it.
Index annuities are all about averages. People often comment about how the sequence of returns might affect cumulative yield. While that is very important in stocks and mutual funds it matters much less with index annuities. Instead of the up, down, up the index annuity goes up, flat, up. This product alone solves the problem of reverse dollar cost averaging for retirees.
Just look at the lost decade from 2001 to 2010. It was one of the best times to have owned an index annuity. The S&P 500 was down around 20% at the end of it but index annuities were positive by a healthy margin. Volatility creates opportunity when your downside is protected from loss. Many analysts suggest we are headed for another lost decade and using that as a reason to not buy an annuity is just an excuse. If any of you really feel that way then what the heck are you doing in the stock market? In another lost decade index annuities will shine bright.
Is there merit to timing the market before buying an annuity? Maybe but in the end I just don’t think it will swing the needle. At best it will give you an extra couple percentage points in one year but you’ll get the other side of it somewhere so I’m sure it will all even out. If you think this is your reason for waiting I’ll bet that the real hesitation comes from somewhere else. This would be a perfect spot for me to send you back to an old newsletter: 9 Reasons People Don’t Buy Annuities.
Enjoy your weekend!