Episode 33: Comparing Risk vs. Safety With Fixed Index Annuity Returns

Recently, I’ve had several conversations regarding some of the fixed index annuity returns that I’ve placed in the past couple of years. These real-world situations offer valuable insights into how these annuities perform.

Understanding Fixed Index Annuity Returns

When I help people fund these pure growth annuities, I always set the expectation of achieving an average return between 4%-7% over a 10-year term. This means that at the end of the term, the average annual return would be 4%-7%.

It’s important to understand that this is very different from getting a fixed return every single year because no investment works like that.

The only type of investment that has a consistent flat return is one with a fixed return rate. Even when you’re in the market with equities, you will have years with huge gains and years with huge losses.

The Importance of Safe Investments

With annuities, you’re going to have some big years and then years with low growth, or even no growth. The whole point of the annuity is to provide protection while your other investments might be sustaining a loss. It’s a safe bucket of money to dip into during those circumstances.

I always set clear expectations about what the annuity will likely do. Recently, I had a conversation with a gentleman who received an illustration with some pretty unreasonable growth rates and it is highly unlikely that such returns would ever actually happen.

Realistic Expectations for Annuities

Annuities are not designed for consistently high returns every year. Could they achieve high returns occasionally? Absolutely. But would I bet my client’s future income on that happening consistently? Absolutely not!

People tend to forget these discussions a few years into the annuity term, especially when comparing the returns to the current market, such as the S&P 500.

Current Market Context: S&P 500

As of June 2024, the S&P 500 is hitting some all-time high records. The S&P 500 is comprised of 500 of the largest companies in the United States across various sectors. However, about six or seven companies are primarily pulling up the entire value of the S&P 500. Many other companies are missing their quarterly goals and targets and are not performing well.

Even though it may appear that the economy is doing well, it isn’t. The reliability of information depends on the sources. I personally lean towards sources that have been accurate in the past and avoid outlets like CNBC, where some of the interviewees are also paying for advertisements. By the time you hear a hot tip from financial pundits, it’s often too late to act on it. Be careful about where you get your information and assess the true economic health of the nation.

Comparing Annuities and Market Investments

Let me put these things into context. At the end of 2022, the S&P 500 was down about 19.5% from its all-time high. As of June 2024, it’s up about 40%. The S&P is one of the few indexes performing well. Many other indexes, especially some proprietary risk-controlled indexes from annuity companies, have been flat, down, or only slightly up.

Some of these indexes have only achieved about 3.5 percent per year over the past two years.

Performance Comparison Table

Investment of $100,000 Value at the End of 2022 Value as of June 2024 Average Annual Return
S&P 500 $80,500 $113,000 40% (over period)
Fixed Indexed Annuity $100,000 $107,000 3.5% per year

So, let’s compare: If you had $100,000 in the S&P 500 and by the end of 2022, it had lost 19.5%, that would leave you with $80,500. If you stuck with it and rode the wave, now you’re up 40%, bringing your investment to almost $113,000. If your annuity only achieved 3.5% per year over the past two years, that same $100,000 would be worth just over $107,000. The difference in the ending value of your money over the same period is a little more than 5%.

Preparing for Economic Downturns

We’re in an election year, and we’re way overdue for a recession. We haven’t had one since 2008, and all the indicators suggest a downturn is imminent. Hopefully, you’re not overly dependent on your equities. If you encounter financial difficulties, having a reliable investment like a fixed indexed annuity, a bank CD, or a money market, ensures you have a safety net. Eventually, the market will recover, and opportunities will arise again. This cyclical nature is how the market has always functioned.

Managing Expectations

I strive to avoid over-promising to my clients because I’d rather under-promise and hopefully over-deliver. Every financial product has its pros and cons. We need to be specific about the purpose of our money and choose the right products in the right balance to meet our financial needs.

That’s why I focus on the educational aspect, not on propaganda that claims annuities will solve all financial problems.

In this week’s short podcast episode, I go through some examples that will likely help you see this picture a bit better, so make sure to give it a watch or listen.

And if you have questions about what kind of returns you could expect for your specific situation, make sure to schedule a call using my by clicking the “Schedule a Call” button in the top right corner.

PODCAST EPISODE 33: Comparing Risk vs. Safety With Fixed Index Annuity Returns



Download Episode 33: Comparing Risk vs. Safety With Fixed Index Annuity Returns on Apple Podcast

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