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Retirement Planning > Retirement Investing > Annuity Investing

Index annuity returns and securities clich?s

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A tired clich? from securities salespeople is to dismiss index annuities by saying you cannot get a competitive return with an index annuity because you do not get the benefit of reinvested dividends and you don’t share in 100 percent of the index movement. Unfortunately, all this shows is a lack of understanding of how most index annuities work and where they are designed to fit.

The first problem with this argument is that sometimes the stock market goes down and the non-index annuity client also shares 100 percent in these losses. For example, if the index was down 9 percent the following year the investor would have lost all of the market gains, but the typical index annuity owner would still have 4.2 percent AND the typical index annuity would have reset the index calculation point for new gains.

For the 10-year period ending in December 2007 the S&P 500 produced an annualized return, with dividends reinvested, of 5.9 percent.

If you look at the actual returns of annual reset index annuities with published renewal histories, you find the annualized return for these index annuities bought at the end of 1997 for the ten years ending in December 2007 averaged 5.2 percent. These index annuities effectively gave 88 percent of the index fund return that included reinvested dividends.

The S&P 500 without dividends — which is what index annuities look at — returned 4.2 percent a year. The average annuity participation in some years was less than 50 percent of index gain and yet the index annuity annualized return had effective overall participation for the ten year period of 123 percent.

How is this possible? Because during the three-year, millennium bear market when the S&P 500 dropped by half, these index annuity owners kept their credited interest and bided their time until the bull market returned.

These were annuities that calculated and credited interest each year. There were also three annuities marketed at the end of 1997 that did not credit interest until the end of the 10-year term and these term end-point annuities yielded 3.2 percent to 4.2 percent a year.

The reality is 99 percent of index annuities purchased lock-in interest annually or biennially and reset the calculation point to potentially benefit from bad times.

But it is also wrong for annuity folks to use examples such as these and say “You’ll get 88 percent of what an index fund does with an index annuity.” Instead of 10-year results I could have used the reported index annuity returns for the 5-year period ending last year where index annuity participation was only 38 percent of the annualized return of S&P 500 index funds for the same period.

Just as a securities salesperson shouldn’t compare the returns of a savings account with a stock, they shouldn’t compare an index annuity with a mutual fund, and neither should annuity producers.

Don’t miss Jack Marrion at Senior Market Advisor Expo, Aug. 20-22. Visit for more information.


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