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The World of Saving, Investing and Taxes
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March 2, 2009
Losses hurt... MORE than gains help
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The real value of an equity index annuity, also called fixed index annuities or equity-linked index annuities, is that it never loses value even when the index to which interest is linked drops.
Skeptics say these safe and guaranteed insured accounts simply cannot keep up with the stock market due to the earnings limits that are inherent in an indexed annuity. For example, a typical indexed annuity limits annual interest to a certain percentage (called a "cap"), or to a percentage of the gains of the index (called a "participation rate" where the annuity earns only a percentage of the index gains), or only after a "spread" (where the first stated percentage of the index gains is foregone after which all interest is credited to the account).
However, research conducted by Ed Easterling of Texas-based Crestmont Research found that the value of avoiding loses is staggering. According to Easterling's independent study, if you avoid 100% of stock market losses you only need to earn 30% of stock market gains to end up with the same amount as if you had earned 100% of the gains and 100% of the losses.
That's right. By avoiding all investment losses you only need to earn 30% of the stock market gains and you will end up with the same result.
Imagine the peace of mind that you will feel from knowing that you are avoiding all the losses and getting off the emotional rollercoaster of stock market investments and yet still achieving long term stock market (as measured by a stock market index such as the S&P 500).
So, what if your equity indexed annuity earned more than 30%? Then you should earn more than the stock market with none of the risk. As of the time of this posting (March 2009) most index annuity accounts that use a percentage of the index to calculate your annual interest are crediting about 40%. This amount is at all time lows, yet it is still greater than the 30% needed just to keep up with the stock market.
Can an index annuity actually outperform a stock market index? Easterling's independent research shows that it can.
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March 2, 2009
Equity-Linked Index Annuity Accounts Lauded on CNBC
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A panel of financial experts on CNBC lauded the results of equity-linked index annuity accounts in February 2009. In it, the experts fielded a call from an investor who deposited $75,000 into his equity-linked index annuity (also called equity indexed annuities or fixed index annuities or EIA's or FIA's for short). The caller told the experts that over five years his account had grown to $125,000.
His question was whether to surrender the annuity before the surrender charges ended and all experts agreed that did not make good financial sense. Further, one of the financial experts said he wished his own accounts had generated those results and told the caller his annuity was a home run.
For the five year period ending September 2008 the average equity indexed annuity returned about 5.15 percent versus about 5.05 percent for the S&P 500 index not including dividends. Over that period of time an initial deposit of $100,000 would have grown to be worth roughly $131,000 for each. However, by the end of October 2008, the S&P 500 index account would have dropped to about $93,000 while the equity indexed annuity lost no value. (Source: The Advantage Group)
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October 27, 2008
Article Missed The Point of Indexed Annuities
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Ron Lieber's New York Times article that cautions against index annuities misses many points.
He cautions that they are too complicated yet they are no more complicated than a prospectus.
He cautions that surrender penalties are of great concern, yet his alternative portfolio over any time period has involuntary surrender (liquidation) values far less than the initial investment at many points. Conversely, annuity surrender charges are in full control of the contract holder.
He opines that the "high commissions" are problematic yet an 8% commission over 10 years is 0.8% per year yearly, paid by the insurance company, versus an average investment advisory fee of 1.5% paid by the investor.
Countless financial experts believe we are in another prolonged secular market. In the previous two secular markets an indexed annuity would have provided better returns with zero market risk compared to the DJIA including dividends reinvested. As an investment advisor I find indexed annuity useful financial instruments.
Finally, the proof is in the pudding. He writes, accurately, that over the last ten years an indexed annuity would be worth $176,478 as of October 24th 2008 while an investment into the S&P 500 would be worth $81,890.
Opinions are wonderful but money in the bank is better.
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