Real World Index Annuity Returns

The Wharton Financial Institutions Center from the prestigious Wharton School (of Business) at the University of Pennsylvania released a study yesterday entitled Real World Index Annuity Returns. This study provides the first empirical exploration of fixed indexed annuity returns based upon actual contracts that were sold and actual interest that was credited on those contracts. The study includes the following findings, none of which should be surprising:

• FIA returns have been competitive with alternative portfolios of stocks and bonds.
• FIA design has limited the downside returns associated with declining markets.
• FIAs have achieved respectable returns in more robust equity markets.
• Studies that have criticized FIAs are typically based on hypothesized crediting rate formulae, constant participation rates and caps, and unrealistic simulations of stock market and interest rate behavior. When actual policy data are used, the conclusions change.

The Wharton study concluded that from 1997 through 2007, for the contracts examined, five-year annualized returns for FIAs averaged 5.79%. These returns compare to 5.39% for taxable bond funds and 4.73% for traditional fixed annuities over the same period. The study also found that for the period from April 1996 through December 2008, a specific and typical FIA's returns bested the S&P 500 alone 66% of the time and a 50/50 mix of one-year Treasury Bills and the S&P 500 80% of the time.

Not surprisingly, the study finds that FIAs are particularly desirable for consumers who are especially concerned with avoiding losses because they are "designed in a way to avoid downside risk [and] they tend to produce preferred return patterns for such [risk-averse] consumers when compared to alternative investment strategies that expose consumers to significant levels of that risk."

The study's conclusion won't be a surprise to those familiar with FIAs:

How will index annuities perform in the future? We do not know but the concept has proven to work in the past and any articles should reflect this. FIAs were not designed to be direct competitors of index investing nor have FIAs been promoted to provide returns to compete with equity mutual funds or ETFs. The FIA is designed for safety of principal with returns linked to upside market performance.

We already knew that an FIA can be a good product for nearly any consumer and that FIAs are particularly advantageous for risk-averse consumers. The Wharton Financial Institutions Center has now provided a powerful tool -- from a respected an unbiased authority -- to support and substantiate what we already knew.

Real World Index Annuity Returns

About this Blog:

Understanding what is available to you is more important now then ever. Learn How to Retire is part of your educational journey and was developed to help you find the new Safe Money alternatives you need to accomplish your retirement goals. In today’s economic environment one must realize that the only way to find success is through individual empowerment. Once you have taken the time to educate yourself you only then have the power to make the right decisions and put the trust factor on your shoulders. The more you know the more you will succeed. www.LearnHowToRetire.com is “Individual Empowerment” Once you have taken the steps to understand then you are free to find the qualified and trusted advisor to help take your knowledge and formulate a plan. www.safemoneyrep.com “Where People Find Trusted and Qualified Advice”

Emotions and Retirement Income

Emotions drive almost all of our decisions in life. If I were in my late 50’s early 60’s and my broker did not have my investments diversified properly I may have lost 40% of my retirement money this year. I think I would be a little upset and want to do something about it. In such a devastating situation your accumulation timeline to accrue the money you need to live in retirement has now drastically changed; therefore requiring a new financial game plan, an undiversified gamble is no longer the recommended approach.

Knowing that interest rates are at an all time low and that I can only receive a 5 yr guaranteed bank CD at about 2% annually I would think a good portion of your retirement money would be better suited in a 5 yr annuity at 4-5% tax deferred. That would make a lot more sense; you should always at least try to keep up with inflation. There is also 1-3 yr Multi Year Guarantee Annuities available at 2-3.5% annually.

Gambling is not for everyone and especially for the ones that have already gambled and lost big. You don’t have to gamble with your retirement money anymore. There are alternatives available that will not only guarantee your principal but also give you indexed linked returns that can never go backwards. You will not get all of the index growth but you will also not get any of the index loss. For example: if the S & P 500 goes up 10% in a year you could get 8.5% for that year depending on the product you chose. If the S & P was to go down you would not lose a dime and receive 0% for that year. Every year your gains will lock in never to be lost. There are still other Safe Money Alternatives available for those who are considering retirement in the next 5-20yrs that will guarantee between a 5-8% return annually as long as you use these funds for a guaranteed lifetime income, any unspent cash values will go immediately to your beneficiaries at the time of death. These products also allow you to participate in index linked gains while accessing your lifetime retirement income.

As I said earlier diversification has always been the key to success and that is why these strategies are just for the Safe Money assets you have “The money you can not afford to lose” The older you get the higher percentage of your assets belong in the Safe Money category. To get a better understanding and more answers to some of your most immediate retirement concerns visit www.LearnHowToRetire.com

Calculating how much you will need in retirement: Factoring Inflation

An old friend bought me a book about tackling the subject of how to approach the last third of your life – great book – chock full of humor and usable tactics to employ in the battle against age. I recommend everyone read it. Frequently. Because there is a lot of good advice in it and, if you are at all like me, some of it is bound to fall out of your head from time to time. The name of the book is “Younger Next Year*“*, by Chris Crowley and Henry S. Lodge, M.D.

There is some real-down-to-earth advice on just about every aspect of living the last half or last third of your life. Some of the most useful and sobering can be found in chapter thirteen: Chasing the Iron Bunny. In this section the authors declare matter-of-factly: “There’s one change that hits in retirement that you cannot duck and that you must prepare for as early as possible. There’s less dough“. The statement itself is not particularly insightful but awesomely important because the fact is so often and so easily overlooked by too many of us.

What is particularly impressive is the advice the authors provide on calculating how much you will need in retirement. Here is a brief breakdown:

1. “Make a realistic estimate of how much income per year you are going to have in retirement.”

2. “Unless your income is inflation-protected, adjust it downward by five percent.”

3. “Assume things will be worse and adjust downward another five percent.”

4. “Take a hard look at your prospective sources of income. Calculate coldly how reliable they are and make appropriate adjustments.”

The chapter goes on to help us approach and cope with living on a fraction of what we are currently accustomed to. I will be visiting the points above and use them to help us develop a financial strategy toward retirement and throw in some recent history to view different scenarios.

First things first, it is critical that your income source includes investments whose returns outpace the rate of inflation. The rate of interest earned on a five year CD currently does not provide the edge required. I suggest you extend the length of the accumulation phase, as the longer the accumulation phase, the higher the rate of interest gained.

Be conservative in your calculations. Assume a longer retirement horizon. People are living longer these days. If you follow the book’s instructions, you will be living a whole lot better longer.

If you purchase a 10 year CD instead of a five year CD you can gain up to a full percentage point in interest. If you purchase a fixed income annuity you can gain up to 5 percent more and can even decrease the length of the accumulation phase if you wish. Even in poor performing market periods, your FIA will protect your income against inflation. If the market performs well your FIA will outperform any CD.

If you follow the advice of the authors, the downward adjustments you need to make in compiling a realistic estimate of how much income per year you will need in retirement are drastic. But they need to be. Inflation alone eats away at retirement income value and recent history tells us just how precarious our nest egg is when tied to market performance.

Above all else, protect your principle.

In the coming articles we will discuss, among other things, a comparison of possible retirement income sources and an evaluation of the reliability of each. We will also discuss just how important it is to speak with a financial advisor.

To cite the authors of “Younger Next Year” once more: You do not want to be swimming away from the wreckage at seventy. You need to talk to someone and start planning as soon as possible. At the very least, start doing some research on your own. Visit the LHTR Planning section to begin.