Annuities

Traditionally, annuities have been a core investment in many retirement portfolios. At Secure Retirement, we do the most thorough research to recommend annuities for your specific needs. In many respects, the best annuities these days are called "equity index annuities." This product is designed to go up if the stock market rises, but these annuities never go down in value. There are two parts to an equity index annuity:

1. An equity index annuity is a fixed annuity, distinct from a variable annuity. Unlike a variable annuity, a fixed annuity can never go down in value. The entire principal and at least a modest return are guaranteed. Another distinction between a fixed and variable annuity is that fixed annuities do not deduct expenses or fees from your account, nor are there any fees to purchase a fixed annuity.

Fixed annuities are one of the safest fixed income vehicles. In our research, we haven’t been able to find one person who has ever lost a penny in an equity index annuity.

2. While these annuities provide minimum guaranteed returns, most of the gains usually come from their connection to the stock market. They are tied to the stock market, and they receive some, though not all, of the market’s gains, but none of the losses. If they gave you all the gains from the stock market but none of the losses, they would definitely be “too good to be true.” A general rule you should always follow in finances is that if something looks too good to be true, it isn’t true. Equity index annuities aren’t too good to be true, but they may be the best fixed income choice in this economic environment.

Most equity index annuities give the owner a certain amount of the upside of a stock market index, such as the S&P 500 index of 500 of the largest U.S. corporations. For example, you might receive the amount the S&P 500 gains in a year, up to a cap of 12%. If the stock market went up 15% in a given year, you would “only” receive a 12% return. But if the market dropped 15%, your account would not go down at all. In essence, you are trading away some of the potential gains from the market in order to eliminate all losses. This is a sensible trade for many retired investors to make.

The particular equity index annuities we use would have returned approximately 7% a year over the last 50 years, had they been available the entire time, with no stock market risk and 15 times less volatility than the stock market. In our search to date, an expected return of 7%, with guaranteed principal, is the best risk and return combination we can find. As a result, we recommend them as a core holding in many of our retirement portfolios.

How to Select Equity Index Annuities

Objective research is absolutely essential when considering equity index annuities. There are now approximately 120 fixed index annuities from which to choose. Many have ten or more ways in which you can allocate your money. This means that there are hundreds of possible ways you can participate in an equity index annuity today. Plus, the number is expanding, as their popularity continues to grow throughout the country. In 2004, $25 billion was deposited into this type of annuity.

In order to select the best annuities, thorough, objective research is needed. We regularly receive updates on all the annuities on the market. As new annuities are introduced, we gather the necessary information on their terms. This data is analyzed to determine which of the annuities will provide the highest returns.

You may wonder if this type of analysis leads to substantially better choices, or if the different annuities are fairly similar in value. In fact, the results are dramatic. For example, the 10 year fixed index annuity with the most competitive structure would have returned over 7% a year on average over the last 50 years, while the least competitive would have returned 3.42%. (Data from "The Advantage Index Card,” by Jack Marrion of the Advantage Group, July, 2004.) As you can see, the difference between the best and worst is quite large.

Further corroboration can be found in the returns our clients have received. In 2004, the annuities we purchased for our clients returned from 9.5-10.5%. This more than doubled the returns from the least competitive annuities.