Index Annuity vs. Mutual Funds

Fixed indexed annuities and mutual funds are very different investments but they can be used for basically the same purpose, long term growth.


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?


Performance Ė 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 retirement income 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 each year.


Indexed annuities 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. 


Example Ė Mutual Fund 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 the indexed annuity. 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 indexed annuity 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 guarantees 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 email at


Juan Pablo Blanco, Grady Elliott and the Rest of the Smeed Financial Team
201 Sand Creek Rd. Ste. E
Brentwood, CA 94513



SMEED CPA, Inc | 201 Sand Creek Road, Suite F | Brentwood, CA 94513
The Next Frontier CPA Firm | |
Phone: 925-634-2344 | Fax: 925-634-2346 | Cell: 925-207-6771