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Variable Annuity Performance

What type of returns can you expect from a Variable Annuity?

Expected Variable Annuity Performance

Due to the fact that yields depend on market performance and an individual investor's portfolio choices, Variable annuity performance is difficult to estimate.    Using historical asset class performance figures, a portfolio consisting primarily of equities (stocks) can return 10-14% annually when averaged over 10-20 years. Due to market volatility, it's impossible to estimate future performance for periods less than 10 years.

Over the past 80 years, small and large cap stocks yielded just about 12-14% annually. The S&P 500 averaged a 12.5% return.

Compared to interest based options like Treasury Bills & Government Bonds, equities historically have performed two to three times as well.  Under most circumstanced neither someone close to retirement age nor investors already retired will not want to invest exclusively in equities due to the risk of short-term market downturns. Although blending stocks with fixed-rate options such as bonds may lower your variable annuity yield to 5-10%, it is recommended for a well-rounded, secure retirement plan.

Performance information based on the past performance of a product's investment options is not an indicator of future results.


The above is a hypothetical comparison of an index annuity vs a direct S&P 500 investment. This is how your balance would have looked between 1999 and 2009. The index annuity in this example has typical contract terms: 100% participation rate, 9% cap, and it resets annually.

 

A $100,000 investment directly into the S&P 500 in 1999 would have resulted in an approximate balance of $73,459 by 2009. The investment would have lost over $15,000 not to mention inflation. On the other hand, your index annuity would be worth over $150,000, a difference of over $77,000.

Notice that index annuity never loses ground when the S & P has a negative year. The reason for this is that it 'locks' in previous years' returns, meaning it will never go lower than its highest point. Sound too good to be true? The trade off is that in periods of substantial market growth, the annuity will only participate in a portion of it.

The Tax-Deferred Variable Annuity Advantage


Although variable annuities don't qualify as capital gains, they offer substantial benefits over those instruments taxed year-over-year at ordinary income rates. Such instruments include mutual funds, CDs, and money market accounts.

With a variable annuity, you can delay tax payments until making income withdrawals, which typically occurs after appreciable growth. Over the long-term, this added benefit adds up.

Compared to fixed-rate options, variable annuities have historically offer greater returns. By definition, rate variability exists with Variable Annuities, but over timeframes of 10 or more years, market fluctuations give way to consistently higher growth. In relation to mutual funds and stocks, variable annuities offer near-identical yields with a few extra advantages:

  • Tax-deferral
  • Penalty-free withdrawal allowances
  • Death benefits
  • Lifetime income option

For retirement planning, a variable annuity is a good supplement to a 401(k). As a mutual fund alternative, variable annuities are recommended on account of their tax benefits. As a straight-up stock market or index alternative, variable annuities are recommended on account of their lower risk and desirable retirement options.


Continue to Variable Annuity Drawbacks

Annuity buyer's guide: The pros & Cons of annuities

The Annuity Buyers Guide provides a clear, honest breakdown of annuities.

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