- 6,457
38 yr Old Wants Fixed Indexed Annuity
- Thread starter SecureHealth1
- Start date
, it yourself. You have a great future as a politician.
- 29,487
Nice add on. You know you made that 2nd part up.Couldn’t have made it up it better myself....well, I guess I did make up the second part of that quote. I'm sorry for being an ass LD.
Signed,
*ick
- 6,457
This may be a dumb question, but...
Don't the companies offering annuities depend on a reasonably healthy stock market underlying their business procedures? Aren't they just offering to remove someone's risk of cash flow variation due to market fluctuations in exchange for a fee? If so, that would seem to make the idea of equity investment make sense for a younger person when their concern is building a resource rather than using it.
Don't the companies offering annuities depend on a reasonably healthy stock market underlying their business procedures? Aren't they just offering to remove someone's risk of cash flow variation due to market fluctuations in exchange for a fee? If so, that would seem to make the idea of equity investment make sense for a younger person when their concern is building a resource rather than using it.
- 11,275
Nope. That's not how fixed indexed annuities work.
It's a common mistaken belief that fixed indexed annuities are invested IN the market, but protected on the downside by simply paying a fee. That description would more aptly describe variable annuities, which actually ARE invested in the market through various mutual-fund sub-accounts.
Fixed Indexed Annuities are not invested directly into the stock market. What happens is that you take a "standard" fixed annuity, and you forfeit the fixed interest, and instead choose an indexed interest segment offered by the insurance company. (Notice I used the word 'segment' rather than 'fund' because 'fund' implies that you are actually invested IN the market.)
Assume a 3% interest rate environment: 100% - 3% = 97% remaining that would grow back to 3% within the year. That's an overly simplistic example, but generally how it works.
The insurance company takes "the 3%" and they purchase stock market call options. They do it by computer software programs and buying them in large quantities to make them as advantageous as possible. The more favorable the pricing of the call options + the more favorable the interest rate environment = higher caps available for these fixed indexed annuities. There are also uncapped options where you use a spread to pay for your indexed segment, depending on the carrier and products they offer.
Now, stock market options have strike prices where you can exercise the option or let it expire worthless. This has always been the case with options, depending on where the market is on any given day. Because of this, that is why there are caps, participation rates, and/or spreads on these indexed segments.
The insurance company is not "keeping the difference" because it didn't HAVE the difference. The insurance company is simply exercising stock market call options. Obviously they do it in a way that is profitable, so that's why caps, spreads, and participation rates vary and vary based on prevailing interest rate & stock market call option pricing.
The reason they are not securities, is because insurers do this with their general account, rather than directly with each annuity. The annuity holder simply chooses which indexed segment they want and wait for the results.
Now, because this is done with stock market call options, this is why you don't get the dividend performance - because dividends are paid to those who OWN those stocks, not based on stock market movements.
This is why we can say you can have the upside of the stock market (subject to caps and other limitations) without the downside risks.
- 11,275
That's the "annual scorecard" way of looking at it.
If the market did 20% and the cap was 4.5% (approximately today's annual point-to-point cap), then you only get the 4.5% for that index segment. (I wouldn't do that myself, but just using an example.)
Let's look at an example of stock market volatility and how it affects a portfolio:
Year 1: $100,000 x 10% = $110,000
Year 2: $110,000 x -10% = $99,000
Year 3: $99,000 x 10% = $108,900
Year 4: $108,900 x 10% = $119,790
FIAs truly shine after a market decline, because they don't lose any money.
Follow this scenario for a few years.
- If the market returns 10%, you get 7%.
- If the market returns -10%, you get 0%.
Year 1: $100,000 x 7% = $107,000
Year 2: $107,000 x 0% = $107,000
Year 3: $107,000 x 7% = $114,490
Year 4: $114,490 x 7% = $122,504
Long term, where would you have the most money?
Oh, I forgot to reduce the stock market example by the annual fees. Feel free to reduce the returns (and deepen the losses by an additional 1-2% for most mutual fund or RIA portfolios).
If you're only looking at the annual returns, yeah, it can FEEL like you're giving up returns. But principal protections, even with a SMALL correction, can help you preserve and grow your wealth better than "riding the market".
Now, is 7% a good number to use? It depends on your products and your available index strategies. It may be a good number if you have UNCAPPED strategies that use a spread, and you anticipate more market swings (but they wouldn't work so well without some good volatility).
It's about growing retirement wealth, not "chasing" returns.
In essence, I just described in numerical terms what charts like these describe (the one below is an older version). Yes, in some years (usually the early years before a correction), you'll be "behind" the market. But having 100% of your money available for the rebound is where fixed indexed annuities shine.
If the market did 20% and the cap was 4.5% (approximately today's annual point-to-point cap), then you only get the 4.5% for that index segment. (I wouldn't do that myself, but just using an example.)
Let's look at an example of stock market volatility and how it affects a portfolio:
Year 1: $100,000 x 10% = $110,000
Year 2: $110,000 x -10% = $99,000
Year 3: $99,000 x 10% = $108,900
Year 4: $108,900 x 10% = $119,790
FIAs truly shine after a market decline, because they don't lose any money.
Follow this scenario for a few years.
- If the market returns 10%, you get 7%.
- If the market returns -10%, you get 0%.
Year 1: $100,000 x 7% = $107,000
Year 2: $107,000 x 0% = $107,000
Year 3: $107,000 x 7% = $114,490
Year 4: $114,490 x 7% = $122,504
Long term, where would you have the most money?
Oh, I forgot to reduce the stock market example by the annual fees. Feel free to reduce the returns (and deepen the losses by an additional 1-2% for most mutual fund or RIA portfolios).
If you're only looking at the annual returns, yeah, it can FEEL like you're giving up returns. But principal protections, even with a SMALL correction, can help you preserve and grow your wealth better than "riding the market".
Now, is 7% a good number to use? It depends on your products and your available index strategies. It may be a good number if you have UNCAPPED strategies that use a spread, and you anticipate more market swings (but they wouldn't work so well without some good volatility).
It's about growing retirement wealth, not "chasing" returns.
In essence, I just described in numerical terms what charts like these describe (the one below is an older version). Yes, in some years (usually the early years before a correction), you'll be "behind" the market. But having 100% of your money available for the rebound is where fixed indexed annuities shine.
- 6,457
Ok, this is all a bit of a challenge for me to follow (and I may be too old now for it to make any effect for me personally anyway). But yes, I have equated return (and saving it) with building wealth. (ie high return builds wealth for young people and provides better living for old people.)
What about dividends? Buy a stock that issues dividends. Plough them all back into the dividend reinvestment program. The directors are under pressure to keep the per share amount constant or increasing, so if the stock goes down the dividends just buy more "principal" for the next dividend date. Is the most likely result still a smaller capital base some point in the future?
What about dividends? Buy a stock that issues dividends. Plough them all back into the dividend reinvestment program. The directors are under pressure to keep the per share amount constant or increasing, so if the stock goes down the dividends just buy more "principal" for the next dividend date. Is the most likely result still a smaller capital base some point in the future?
LD, you look at total returns. Price changes + dividends + interest = total return. Calculate the 'internal rate of return" which is not the "average return" and you have calculated the growth rate of the principle.
Like I said earlier. RTFM. You may be able to understand the liberal arts version.
Like I said earlier. RTFM. You may be able to understand the liberal arts version.
- 10,328
What is the best recipe for bolognese sauce?
Ask 20 Italian grandmas, and you will get 20 different answers. Ask 20 financial whatevers what the "best" thing to do is, and you will get 20 different answers.
Return is irrelevant without accounting for Risk.
Portfolio allocation is irrelevant without accounting for Need and Risk Tolerance.
Anyone who disregards market risk or timing risk is a fool. Ive counseled want to be retirees through those times. Its a real danger.
Anyone who says one way is better than all others is a fool, no 2 peoples situations are the same. And there are a million different options out there to get any given return that is needed.
There are a million different combinations that will get you where you need to be in retirement. Find what you like best. But dont take more risk than you need to. Find your need, and find a combo that meets that need.
Ask 20 Italian grandmas, and you will get 20 different answers. Ask 20 financial whatevers what the "best" thing to do is, and you will get 20 different answers.
Return is irrelevant without accounting for Risk.
Portfolio allocation is irrelevant without accounting for Need and Risk Tolerance.
Anyone who disregards market risk or timing risk is a fool. Ive counseled want to be retirees through those times. Its a real danger.
Anyone who says one way is better than all others is a fool, no 2 peoples situations are the same. And there are a million different options out there to get any given return that is needed.
There are a million different combinations that will get you where you need to be in retirement. Find what you like best. But dont take more risk than you need to. Find your need, and find a combo that meets that need.
Last edited:
- 11,275
There is no "one size fits all", that's true.
I would say that, in my opinion, intelligent advisors would want to manage retirement assets on the side of caution, rather than chasing returns. It also has the added advantage of preserving the assets to charge fees against.
FIAs aren't the only way to go. Tactical asset management programs are another way to do something similar to what I've talked about - but with management fees and you cannot "guarantee" the safety of principal.
Most people can't handle the dips of the market. And with the market around 25,000 (give or take), a 10% correction would dip 2,500 points for the year.
If we look at the reason for most complaints against an advisor, it wouldn't be that "the market returned 20% and I only got 15%". It would be "the market was volatile, and I told him that I was a conservative investor, and I lost 20%."
Obviously, I'm talking about the professional advisor standard for licensed professionals, rather than those who are simply "fans of investing" and doing it themselves.
I would say that, in my opinion, intelligent advisors would want to manage retirement assets on the side of caution, rather than chasing returns. It also has the added advantage of preserving the assets to charge fees against.
FIAs aren't the only way to go. Tactical asset management programs are another way to do something similar to what I've talked about - but with management fees and you cannot "guarantee" the safety of principal.
Most people can't handle the dips of the market. And with the market around 25,000 (give or take), a 10% correction would dip 2,500 points for the year.
If we look at the reason for most complaints against an advisor, it wouldn't be that "the market returned 20% and I only got 15%". It would be "the market was volatile, and I told him that I was a conservative investor, and I lost 20%."
Obviously, I'm talking about the professional advisor standard for licensed professionals, rather than those who are simply "fans of investing" and doing it themselves.
- 10,328
Exactly. Amateurs seldom have a solid understanding of market risk, and especially timing risk. And people who's only benchmark is "how much it returns" are exactly that, amateurs.
It would be a violation of regulations and professional codes of ethics for a licensed advisor to give advice that way. Advisors are required to consider a clients risk tolerance and their needs. Without that, everything else is meaningless.
