The interest rate you receive from an index annuity varies because your investment is linked to the S&P 500, or a similar stock market index. The returns will also differ from product to product, because of different crediting methods. An index annuity balance is impossible to predict, but we can look back at how they would perform in past market conditions.
Index Annuity vs S&P 500 Performance
The above is a hypothetical comparison of an index annuity vs a direct S&P 500 investment. This is how your balance would have looked between 1999 and 2009. The index annuity in this example has typical contract terms: 100% participation rate, 9% cap, and it resets annually.
A $100,000 investment directly into the S&P 500 in 1999 would have resulted in an approximate balance of $73,459 by 2009. The investment would have lost over $15,000 not to mention inflation. On the other hand, your index annuity would be worth over $150,000, a difference of over $77,000.
Video of real life example.
Notice that index annuity never loses ground when the S & P has a negative year. The reason for this is that it ‘locks’ in pervious years’ returns, meaning it will never go lower than its highest point. Sound too good to be true? The trade off is that in periods of substantial market growth, the annuity will only participate in a portion of it.
Performance in a bull market
This second chart is show the same annuity vs the S & P 500, only in one of the biggest bull markets, 1990-2000. Because an Indexed Annuity ‘Caps’ the rate of return (in this scenario 9% per year), it will not see the full returns in market conditions such as this.
This means, if you’re looking for maximum growth and you are less concerned about the possibly of losses, a fixed indexed annuity may not be the right choice. However, if you want principal guarantees with the potential to surpass the rate of return of a traditional annuity, an indexed annuity would be worth taking a look at.
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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