- 1,641
Weighing an Investment That Promises No Risk
And how might this strategy have worked out using the backward-looking comparison of the first example?
The bond would cost $74410. $25590 would have been invested in the S&P fund, which lost 22.11% (seems low, but we'll use their numbers). $25590 less 22.11% (we'll also ignore trading costs) is $19,932.
At the end of ten years, the EIA is worth $176,478. The zero-copon bond plus S&P money is worth $119,932.
DIY'ers short-changed themselves $56,546.
The writer shows his dislike of annuities with:I asked GoFigureNow, an actuarial and educational service that helps sales representatives calculate historical returns on index annuities, to calculate the return on an index annuity with an 8 percent cap, a participation rate of 100 percent and no spread. This sample product also would have paid a 5 percent bonus to the holder of the annuity upfront (a common sales tactic) and used something called an annual point-to-point crediting method for adding gains on the index to the account.
The result? The index annuity, which started with $100,000 in October 1998, would have had an account value of $176,478 as of Friday’s market close. The S.& P. 500 index fund, which also started with $100,000, would have actually lost money over 10 years, ending with a balance of $81,890.
So consider this alternative, which many financial planners suggest in various forms: Let’s say you have $10,000, and you don’t want to lose a cent of it. You could take just enough of that money and buy zero-coupon Treasury bonds that will be worth $10,000 in 10 years, thus guaranteeing you’ll get your principal back. Then, you could plop the rest in an S.& P. 500 index fund (to get some of that same upside that the index annuity promises).
And how might this strategy have worked out using the backward-looking comparison of the first example?
The bond would cost $74410. $25590 would have been invested in the S&P fund, which lost 22.11% (seems low, but we'll use their numbers). $25590 less 22.11% (we'll also ignore trading costs) is $19,932.
At the end of ten years, the EIA is worth $176,478. The zero-copon bond plus S&P money is worth $119,932.
DIY'ers short-changed themselves $56,546.
Yes, let's all assume we'll get 10%-13% returns.How might that work out for you 10 years from now? In a simulation examining 50,000 different outcomes using the same sample annuity I described above in the backward-looking comparison, and assuming an annualized S.& P. 500 return of 10 percent (7 percentage points from capital gains and 3 percentage points from dividends), the bonds-plus-index-fund strategy beats the index annuity 81 percent of the time. Take that presumed return up to 13 percent, and the index annuity loses 92 percent of the time.