Indexed Annuity Performance

The exact rate of return you'll receive from an indexed annuity is impossible to predict because your funds are linked to market returns, such as the S&P 500 or a similar stock market index. The returns will also differ from product to product. Each annuity provider will have their own method of calculating returns, and each sets their own rates.

Some annuity products have a "cap," which sets a maximum rate of return, while others use a "spread," which deducts a portion of the indexed returns. While an indexed annuities future balance is impossible to predict, we can look back at how they would perform in past market conditions.

Indexed Annuity Historical Example:

Bear Market

In this first example, we will be using an indexed annuity that has a 6-year term, an 8% yearly upside cap (maximum gains in a year), and a 10% yearly downside cap (maximum account value decrease in a year.) Assuming a starting value of $100,000, we'll first look at a real-world scenario with a major market correction during the annuities 6-year term (2007-2013).

Indexed Annuity vs S&P 500 in a Bear Market

As you can see in the chart above, this example shows a scenario in which an indexed annuity can actually outperforms the S & P. The reason for this is the downside protection offered by an indexed annuity. In 2008, the S&P saw a negative return of 38%. Because this particular annuity features a maximum downside cap of 10%, the annuity account value goes down substantially less.

It should never be assumed that an indexed annuity will perform better than the markets, in fact it will typically be lower, however there are certain situations where that could be the case.

Bull Market

In this second example, we will be using the product criteria as before, only we'll take a look at the results in a bull market without any major corrections (2013-2019).

Indexed Annuity vs S&P 500 in a Bull Market

During a bull marketing, the S&P clearly outperforms the returns of the indexed annuity. Just as the annuity has a cap on the downside, there is a cap on the upside. During particularly strong years, such as 2013 which saw a 29% return, the indexed annuity reaches its upside cap of 8% for the year.

The main concept to keep in mind when considering an indexed annuity is that you'll receive only a portion of the markets upside growth in exchange for downside protection.

conclusion

With respect to retirement planning, index annuities offer greater overall benefits than directly investing in stocks or even a market index. Debt-based instruments like bonds and CDs are a guaranteed bet (the same as index annuities), but they offer half the growth potential. This, in addition to miscellaneous advantages like tax-deferral, death benefits, lifetime income options, and probate avoidance, make index annuities a great candidate for your retirement plan.

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