Index Annuity vs.
indexed annuities and mutual funds are very different investments
but they can be used for basically the same purpose, long term
Which is better?
It depends on why you are investing and your specific situation. At
some point you will need to compare the performance of many
investments. You might be looking at indexed annuities and mutual
funds. Which has better performance?
Which Is Better?
Making money in
investments that go up and down in value isnít always as easy as it
is when markets are up. You can lose money. Creating
with mutual funds becomes a function of having more up years than
down years. Then you hope the ups minus the downs equal enough gain
to not have to dip into your principal for your retirement income
are not invested in the market. Their return is based on the
performance of the market. Since they are not invested directly in
the market they also never lose value. You get market-like returns
with zero risk of losing money. It sounds too good to be true!
It is true. The
catch is that you give up Time for Risk. With an Index
Annuity, you are tying up the money for a specific period of time.
(6/8/10/12 years) The trade off is that your Principal will never
be at risk of losing any value while offering you an opportunity to
capture market gains. There are Annuity companies that offer no cap
on capital gain returns. This simply means you can capture most of
what the Market is gaining With many index annuities, a guaranteed
rate of return is also provided along with any market gains.
Returns And Indexed Annuity Returns
If you invested
$250,000 into mutual funds and $250,000 into an indexed annuity your
returns would be very different each year. Letís look at the mutual
fund first and create a general market scenario. The market goes up
10%, down 10%, up 15%, down 10%, then up 10%. For you mutual fund
you values would have been: up 10% $275,000, down 10% $247,500, up
15% $284,625, down 10% $256,162.50, then finally up 10% to finish at
$281,177.75. The total return is 12.47% over 5 years.
Now letís look at
Since indexed annuities have caps the returns are different but
remember they do not lose principal. Letís assume a cap of 7% annual
growth. The market would have performed the same as in the mutual
fund example. For your fixed indexed annuities values: up 10%(7%
Cap) $267,500, down 10% (no downside so zero gain for the
year)$267,500, up 15% (Cap 7%) $286,225, down 10% (zero gain)
$286,225, then finally up 10% (cap 7%) to finish at $314,847.50. The
total return is 25.94%.
In our example the
mutual fund returned 12.47% over five years and the
returned 25.94% over five years. Are indexed annuities better? We
could also see several years of flat or down markets in which case
the mutual funds would look even worse. If that is the case then the
indexed annuity has something that mutual funds do not. While you
wonít lose money in down years in the indexed annuity you wonít gain
either. That is where
are an amazing addition to your retirement arsenal.
Income Guarantees For Down or Slow Markets
Have you ever
wondered what you would do if the market was down or slow for
several years in a row during your retirement? If you are not
retired now then you have some wiggle room to wait out a down
market. In retirement, down years can be detrimental to your
retirement plans and cause you to draw down your already down
principal. In a mutual fund you are out of luck. In annuities you
have optional income guarantees. Basically an income guarantee is a
promise that the annuity company will pay you a certain amount of
income based on your principal value when you invested over a
certain number of years. It is worth looking into because an income
guarantee could save your retirement.
In our example the
indexed annuity beat the mutual funds in the five year return. Keep
in mind that I made up the numbers to learn how the indexed annuity
compares to a mutual fund. The concept should give you a solid basis
to compare your funds with indexed annuities. Also, donít forget
about the income guarantees that can be added to annuities. They can
make the indexed annuity a very strong addition to your retirement
income investments. Always consult with a qualified financial
advisor or insurance agent that is well versed in fixed indexed
annuities before making any changes to your investments.
As always, we are available for any questions or concerns you may
have. So feel free to call or email us at 925-757-6018 or send me an
Juan Pablo Blanco, Grady Elliott and the Rest of the
Smeed Financial Team
201 Sand Creek Rd. Ste. E
Brentwood, CA 94513