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.
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.
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.
Continue to finding the ideal indexed annuity
The Annuity Rate Report contains today's state specific annuity rates.
You'll receive a one-time email with today's highest rates and product guidelines. Purely Informational.
We here to help in anything you
need. Call us on below number.
The following disclaimer governs the use of www.allthingsannuity.com and links from it. By using this website, you agree to the following Disclaimer, Terms and Conditions, and Privacy Policy. The term “you” means a user of this website. The term “our” or “we” means All Things Annuity, its website(s), and any agent of All Things Annuity. The website is owned by Mac Life Marketing, INC (“All Things Annuity”), a Minnesota company. All Things Annuity provides users with general and educational information about annuities and may refer users to unaffiliated financial professionals who are licensed in the user’s state and thereby qualified to address a user’s individual financial situation, which could include evaluating an annuity, providing rates or illustrations and discussing investment risks. Any information provided through this website or through links to other websites are provided for educational and general informational purposes only and should not be construed as legal, investment, financial or tax advice. The information published at this website is not intended to be a recommendation to purchase an annuity. You are strongly urged to consult with a financial professional to determine if an annuity product is suitable to your financial situation. All Thing Annuity accepts no responsibility for any investment decision made by any user of this website, and it is not responsible for any advice or recommendation made to any user by unaffiliated financial professionals to whom the user is referred. Copyright © All Things Annuity 2022. All rights reserved.