Fixed Indexed Annuity Returns

Fixed Indexed Annuity Performance

Future fixed indexed annuity returns can never be accurately predicted because performance is linked to market-indexed returns. The returns will also differ from product to product. Each annuity provider will have their own method of calculating returns, and each individual product will have their own rates. However, we can use past performance to estimate what type of fixed indexed annuity returns you can expect.

Some annuity products have a “cap,” which sets a maximum rate of return. Other fixed indexed annuities use a “spread,” which deducts a portion of the indexed returns. While a fixed indexed annuities future balance is impossible to predict, we can illustrate a specific products returns in prior market conditions.

Fixed Indexed Annuity Historical Examples

Bear Market Conditions

In this first example, we will be using an indexed annuity that has a 6-year term, an 8% yearly upside cap (maximum gains in a year), and a 10% yearly downside cap (maximum account value decrease in a year.) Assuming a starting value of $100,000, we’ll first look at a real-world scenario with a major market correction during the annuities 6-year term (2007-2013).

As you can see in the chart above, this example shows a scenario in which an indexed annuity can actually outperform the S & P. The reason for this is the downside protection offered by an indexed annuity. In 2008, the S&P saw a negative return of 38%. Because this particular annuity features a maximum downside cap of 10%, the annuity account value goes down substantially less.

It should never be assumed that an indexed annuity will perform better than the markets. In fact, it should be assumed that it will be lower. However there are certain situations where a fixed indexed annuities returns surpass the markets.

Bull Market Conditions

In this second example, we will be using the product criteria as the previous example, only we’ll take a look at the results in a bull market without any major corrections (2013-2019).

During a bull market, the S&P clearly outperforms the returns of the indexed annuity. Just as the annuity has a cap on the downside, there is a cap on the upside. During particularly strong years, such as 2013 which saw a 29% return, the indexed annuity reaches its upside cap of 8% for the year.

The main concept to keep in mind when considering an indexed annuity is that you’ll receive only a portion of the markets upside growth in exchange for downside protection.

Conclusion

With respect to retirement planning, fixed indexed annuities offer greater overall safety than directly investing in stocks or even in market indices. While you won’t see extraordinary returns, you will have the peace of mind of knowing you won’t lose money in down markets or corrections.