Here at AnnuityGator.com we regularly break down popular annuities and “test” them to determine what realistic return expectations should be. This exercise has been fun, but it is hypothetical – i.e., it’s based on taking their current structure and using historical data to see what they would have done in the past.
Yesterday I saw a cool article that showed what the average index annuity performance has actually been from 2007 to 2012. The results didn’t surprise me, but they might surprise others.
The study was done by Advantage Compendium, it’s based on the actual returns of real index annuity policies, not back-tested or hypothetical returns.
Fixed Indexed Annuity Average Returns
Here’s what the study found:
The average annual return of all actual fixed indexed annuities in the study was 3.27%. The range of returns was 5.5% average annualized (best) and 1.2% average annualized (worst).
On the surface, this doesn’t sound too bad. However, it really depends on what you compare them to. For example, during this same time period here are the returns of a couple no load, low-cost index funds; as well as some blends of the two showing some simple asset allocations:
|Average Annualized||Best||Worst||Worst Possible 12 Month Period|
|Vanguard Total Stock Market Index Fund||-0.07%||n/a||n/a||-43.14%|
|Vanguard Total Bond Market Index Fund||6.50%||n/a||n/a||0.25%|
|50/50 Blend of Vanguard Funds Above||3.68%||n/a||n/a||-23.09%|
|20/80 Blend of Vanguard Funds Above (20% stock / 80% bond)||5.49%||n/a||n/a||-8.68%|
If you’re wondering why there are n/a in the best and worst columns for the index fund (non-annuity) sets – it’s because there is no range of returns. The only returns would be the average, whereas the annuities had varying degrees of returns between the best performing contracts and the worst.
This study isn’t meant to be a recommendation for or against any of the above investments. It’s more about understanding returns and risks of different investment methodologies. There are some interesting things we notice, however.
- Since the stock market was pretty awful, it’s not surprising this was the worst of the investments in the table
- A lot of people might be surprised that bonds were not only the best but also had the least amount of risk (based on the highest worst 12 month time period)
- Balanced investors still had some bumps in the road, but conservatively balanced investors (the 20/80 bunch) actually did much better than most would think
- If you were lucky enough to invest in the best possible index annuity from 2007-2012 you did about as well as a conservative (20/80) investor in index funds, otherwise, the only investors you outperformed were investors heavy in stocks
- The index annuity returns do not take into account surrender charges – so in reality, the liquidation value returns would be slightly lower than 3.27% average; whereas index mutual funds are fully liquid at all times, and generally with no penalty at all
One of the reasons I like studies like this is that a lot of annuity salespeople like to always compare index annuities to the stock market. That’s apples to oranges. A much better proxy is to compare them to other conservative investments, even if they’re not guaranteed like annuities are (based on the claims-paying ability of the insurance company).
When we analyze annuities in this regard, we can see that they’re not bad at all, but there are other options conservative investors might want to consider instead or in combination with annuities. There’s no one-size-fits-all approach and positives and negatives with all investment strategies.
Plus, I’m sure you’ve heard the phrase, “don’t put all your eggs in one basket,” right?
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