Question About Equity Index Annuities

[scagnt83]

Not so. In this chart the index annuity outperformed in only 1 out of 4 down stock years. And in that one year the index annuity didn't outperform by much. I'd say after taxes the annuity probably didn't even win 1 out of 4.

There are multiple things wrong with your assumptions.

1.
The chart you are referring to is 75% Bonds. But you are comparing it to an Annuity who's growth is based 100% on the S&P 500.

If you notice, the 100% S&P index is below the Annuity.

And no, after taxes it would not be lower than the S&P Index since the Index fund is taxable as well (and would not benefit from tax deferral unless its an IRA... and if its an IRA then the taxes are the same for both)

The S&P 500 Index is at 3.20% on that chart.

The Index Annuity is at 4.68%.

To match a tax deferred 4.68% you would need approximately a 5.5%+ taxable return from the S&P 500 Index Fund to match it. (and if I remember correctly you live in CA, which has one of the highest capital gains taxes for the wealthy in the nation)


The only reason the chart you reference outperforms that particular annuity is because of the bond allocation. Which could have been done with an Index Annuity as well... they just chose not to show it.



2.

The Indexed Annuity used in that chart is around a 6.8% Monthly Average Cap. Which is a fair assumption for today's Interest Rate environment... but not necessarily for 1998's rate environment (rates were higher back then).


3.

It is true that the specific comparison that chart shows has the equity portfolio (mostly bonds) as the top performer.

BUT

If accumulation is your goal, you should use a product geared towards accumulation. You can currently purchase an annuity that participates (credits your account) in 95% of the Monthly Average gains of the S&P 500.

Using the same dates as your chart, it would give you a final total of $304,895 vs. $239,659 with the Bond/S&P portfolio.

4.

As other people have pointed out, Indexed Annuities are not meant to do what an equity based portfolio will do.

BUT

They do compare well to what a Bond Index will do for you; provide consistent and stable returns.

The Bond/S&P mix outperformed the Indexed Annuity by 1.32% in that chart.

The Bond/S&P mix outperformed the S&P 500 alone by 2.80%.

The Index Annuity outperformed the S&P 500 alone by 1.48%.

4.68% Monthly Average Cap
7.72% 95% Participation Rate
6.00% Bond/S&P Portfolio
3.2% S&P 500

The 95% Participation Rate Indexed Annuity outperforms the Bond/S&P 500 mix by 1.72%.


______________________


All of this is the problem with investments... nothing will be "the best" 100% of the time. Each year there will be a different winner/loser/in-between.

Then there are all of the different choices. Your chart shows one single annuity, with one singe crediting method... out of a market of 100+ annuities with about 6 or 7 different types of Crediting Methods... (if I showed you a single mutual funds inability to match an annuity you would probably point out that there are 1000s of funds out there) get my point?


But at the end of the day its not about what you could get... its about what you need...

Drifting,
What Rate of Return do you need to create a comfortable Retirement Income? That is the million dollar question.

Then you need to decide how consistent that return needs to be. Since you are approaching retirement, you focus of study should be on "Sequence of Returns" and how they impact withdrawals during retirement.

 

[Drifting]

If accumulation is your goal, you should use a product geared towards accumulation. You can currently purchase an annuity that participates (credits your account) in 95% of the Monthly Average gains of the S&P 500.

Using the same dates as your chart, it would give you a final total of $304,895 vs. $239,659 with the Bond/S&P portfolio.

I think everyone wants the best return for a given (low) risk. Where are you finding this $304,895 number? Is there a website that calculates annuity returns?

 

[KRobby]

No.

You call it bashing. I call it searching for the truth. Let the facts fall as they may.

Good to hear.

Where is this chart?
The key question is WHAT did it outperform? 100% stocks (high risk) or a low risk bond/stock combo? I think the key is to compare apples to apples to see how the IA did.

Unless it's comparing Treasury Bonds, the IA will carry quiet a bit less risk than bonds. Comparing 'apples to apples', we need to compare similar risk. Bonds are quiet a ways away from the same risk, individual and via funds. Even triple A rated bonds that don't default, can and do slip ratings and eventually be on the way.

I think everyone wants the best return for a given (low) risk.

I know you're just answering his statement, but that's the key point. What you said is subjective. IE

On a scale of 1-10, (1 being low and 10 being high)
(Hypothetically and simplicity for illustration):

Investment A had a return of 8 and a risk of 4
Investment B had a return of 6 and a risk of 2
Which investment had "the best return for a given (low) risk"?

There's no right answer.

 

[Drifting]

Unless it's comparing Treasury Bonds, the IA will carry quiet a bit less risk than bonds. Comparing 'apples to apples', we need to compare similar risk. Bonds are quiet a ways away from the same risk, individual and via funds. Even triple A rated bonds that don't default, can and do slip ratings and eventually be on the way.

From 1970 to 2010 a portfolio of 28% stocks and 72% bonds was the lowest risk allocation. 100% bonds had more risk.

I think generally you look at the S&P 500 index and the total bond market -- example AGG or BND. The total bond market actually has about as much volatility as IEI (3 - 7 year bond ETF) even though 38% of the total bond market is comprised of bonds with durations of 10 years or greater.

 

[indiana260]

The chart is called American Equity Real Benefits. It's on a lot of their marketing materials

It does the lines

The s&p, a fixed 3%, and the FIA

 

[Drifting]

Again I would just invest in perhaps 30% S & P and 70% total bond market. Very little volatility and seems to easily outperform the annuity. And no liquidity risk. That can't be understated.

 

[Norwayguy]

Not so. In this chart the index annuity outperformed in only 1 out of 4 down stock years. And in that one year the index annuity didn't outperform by much. I'd say after taxes the annuity probably didn't even win 1 out of 4.

Question

Who created your chart and in 1998 where they advocating that blend. Since 98 the general trend of interest rates has been down which boosts bond performances.

I can create a chart today that absolutely kicks butt from 1998 till today if I made the chart today.

 

[KRobby]

From 1970 to 2010 a portfolio of 28% stocks and 72% bonds was the lowest risk allocation. 100% bonds had more risk.

I think generally you look at the S&P 500 index and the total bond market -- example AGG or BND. The total bond market actually has about as much volatility as IEI (3 - 7 year bond ETF) even though 38% of the total bond market is comprised of bonds with durations of 10 years or greater.

That still carries far more risk than a FIA.

FIA's aren't designed to compete with any combination of stock and bonds, it's a completely different level of risk.

Again I would just invest in perhaps 30% S & P and 70% total bond market. Very little volatility and seems to easily outperform the annuity. And no liquidity risk. That can't be understated.

If you're a consumer, you should probably stop giving advice.

And no liquidity risk. That can't be understated.

Incorrect.

Liquidity risk - The risk that investors may have difficulty finding a buyer when they want to sell and may be forced to sell at a significant discount to market value.

 

[scagnt83]

Where are you finding this $304,895 number? Is there a website that calculates annuity returns?

I showed you the chart from the software I use...... I believe I once offered to show you comparisons using this software once before (maybe it was another poster)


There is no website that has an annuity return calculator (that I know of).
Mainly because of what I stated earlier, there are so many different options out there. Plus the caps/spreads/participation rates etc all change monthly with market conditions. 98% of consumers would not know which crediting method to use and what rates to use with it.

So there is no "Indexed Annuity Return for 2013"... you would need to specify a specific product along with a specific crediting method and caps/spreads/participation. And all of those 3 variables most likely were slightly different month to month had you purchased the annuity in that month. So it would be very hard and extremely inaccurate for a consumer to run the numbers themselves.

Most Index Annuity companies do have illustration software for agents to use and to show to clients. Some software is better than others for comparisons.


There are a few 3rd party software programs out there that agents have access to that can do this. That is what I used to show you the 95% Participation Product that resulted in the $300k number.

The software allows the agent to show how a certain crediting strategy (such as the 95% Participation option) would have performed over a given time period.


The only way for you to do an accurate comparison of any portfolio allocation to an indexed annuity is for an agent to run the numbers for you using real product specs that are available on today's market. (like I did in my chart I posted for you)

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I think everyone wants the best return for a given (low) risk.

Well that goes without saying.

But in reality there is no "best" all of the time. Never has been, never will be.


The problem is that in Retirement the name of the game is no longer "how much can I accumulate". The goal is "how can I create the income I need to enjoy retirement".

If you do not know how much you need then all of this is just an academic exercise for you until then.

But once you decide how much you need to live on, you can then find out how much of a return you need to create that income stream... only then can you start to properly asses the risk you need to take on...

(ex: If all you need is a 3% per year return to create the income you need, why risk money in the market? It doesnt make sense from a risk/reward standpoint. But to know what does or does not make sense you must first know how much you need.)


I will not disagree that a heavy Bond Index allocation can be a great thing to have in retirement.

But it is not the only game in town. As I already pointed out there is currently an option in the Annuity Market that would have outright beat your Bond/S&P portfolio... and it carries far less risk than the portfolio.

That does not make the portfolio a bad thing to do or the wrong thing to do. But if you are going to compare the lowest risk/highest return equity allocation; you should compare it to the lowest risk/highest return Annuity option. Which your chart did not do.

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Again I would just invest in perhaps 30% S & P and 70% total bond market. Very little volatility and seems to easily outperform the annuity.

So easily outperforming something is a 1.32% difference?

The Indexed Annuity that I charted (which is currently available on the market) easily outperformed the bond portfolio by 1.72%... an even higher number...

But I would not call a 1.32% difference "easily outperforming" other asset choices.

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From 1970 to 2010 a portfolio of 28% stocks and 72% bonds was the lowest risk allocation. 100% bonds had more risk.

The problem with using those years for backtesting is that you are incorporating historically high interest rates for bonds in the 70s-early 90s, along with historically high stock prices in the 90s. Your bond allocation in that chart annualized 7.5%.

Looking back 25 years Bonds have an average return of around 9.8%.

But shorten that to 15 years and they are around 6.0%-6.5%.

But shorten that to 10 years and they are around 5%.

Increase that time to 100 years and they are around 5.5%.


I see no evidence of a bond boom like the 80s on our horizon, especially with the Fed dictating rates like they never have before.

Some say we have a bull market for another few years... others say that we are on the edge of a cliff...

Either way I see no predictions for another 80s/90s era of investing.

So you can assume that data will hold true in the future. But I would use more recent & economically relevant stats for my assumptions if it were my money.

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I think generally you look at the S&P 500 index and the total bond market -- example AGG or BND.

Those 2 indexes are perfect examples of the need to use realistic assumptions that are relevant to the modern economy.

The bond return for your chart was around an annualized 7.5%.

But the 2 bond funds you mention have a 5 year return of 4.5%/4.6%.

Their 10 year returns are 4.75%/5%.


So for the past decade the Bond return shown in that chart has not been a realistic assumption to use in planning for future economic conditions.

I think most agree that to base retirement planning around a return that is 3.5% higher than the annualized return for the past decade is just foolish.

 

[Cash]

Question

Who created your chart and in 1998 where they advocating that blend. Since 98 the general trend of interest rates has been down which boosts bond performances.

I can create a chart today that absolutely kicks butt from 1998 till today if I made the chart today.

You all should have been using my "special" blend. You buy tech stocks in the late 80's internet stocks in the mid 90's you then sell them in 2000. Then with my blend, you buy real estate in Florida, Arizona, and Las Vegas. You then sell the real estate in 2005-6 and invest in Gold and find this kid named Zuckerberg or something and invest in his business and go short Bear Stearns..................