I collect actual index annuity return data. Although not every product and carrier is included, based on the data I have, the average reported index annuity return beat the actual S&P 500 return in 63 percent of actual five-year periods going back to 1997. Overall, if you compare the performance of the average index annuity with an S&P 500 index fund for periods from 1997 through 2009, the index annuity wins.
However, rather than accept this reality, some index annuity detractors argue that index annuities may have performed well since they were introduced in 1995 but these aren’t normal times. They often then compare the performance of a hypothetical index annuity with an equity investment over the last 30 years and say, “see, in normal times equities beat index annuities.” However, I submit this period is not representative of normalcy either.
Tracking the differences
The average annual stock market return over the ’80s and ’90s was 17.6 percent, but Jeremy Siegel of the Wharton School looked at the six decades after World War II and found the average annual stock market return, including reinvested dividends, was 6.83 percent. If you had a fictional annual-reset index annuity that averaged a 50 percent participation rate for the same period, your annualized return would have been 7.13 percent, without reinvested dividends.