Fixed Indexed Annuity

Fixed Indexed Annuity vs regular
investments of the S&P 500

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It is a terrifying thing for young investors to think about having their funds tied up in the stock market. Since this is an unpredictable investment, investors are concerned about the security of invested assets. There is never a way to determine whether the S&P 500 will produce positive returns. While this is a cause for concern for many people, some will say that investing for the long haul will reduce the chances of losses in the stock market.
One important question to consider regarding the roller coaster rides of the stock market is whether the account balance will remain the same if the market rises or declines for 15 years and a zero percent return. For example, a client invested $250,000 in the S&P 500 index and there was a 15% return for the first year. During the second year, the S&P 500 declined by 15% and repeated the upswing in the third year. This pattern occurred for 14 years in a row. Would the investment at the end of 14 years remain at $250,000?
Most investors would think, “Yes.” However, the investment would not be the same. The chart below shows the fluctuations for a 14 year period with an average zero percent return. It is clear to see that at the end of the 10 year period, there has been a decrease in the amount of the investment and the net of the stocks is $213,185.

Fixed Indexed Annuities for Asset Protection

Fixed Indexed Annuities is one method that can be used to hedge the risk in the market. These annuities will have decent returns as long as the market is performing well. Fixed Indexed Annuities are a wise investment, but people should not place all of their money into these annuities. However, as the investor ages, it becomes more important that they should allocate more money in a retirement tool that will not decrease and will continue to generate wealth.
The following chart displays the results of a $250,000 investment in a Fixed Indexed Annuity versus the S&P500. We will assume that the cap in the return is 8% each year.

S&P 500 Index

Ending Year Initial Investment Annual Return (%) Return ($) Acct. Balance
1 $250,000 15% $37,500 $287,500
2 $287,500 -15% ($43,125) $244,375
3 $244,375 15% $36,656 $281,031
4 $281,031 -15% ($42,155) $238,877
5 $238,877 15% $35,831 $274,708
6 $274,708 -15% ($41,206) $233,502
7 $233,502 15% $35,025 $268,527
8 $268,527 -15% ($40,279) $228,248
9 $228,248 15% $34,237 $262,485
10 $262,485 -15% ($39,373) $223,112
11 $223,112 15% $33,467 $256,579
12 $256,579 -15% ($38,487) $218,092
13 $218,092 15% $32,714 $250,806
14 $250,806 -15% ($37,621) $213,185
Avg. Return 0.00%

Fixed Indexed Annuity

Ending Year Initial Investment Annual Return (%) Return ($) Acct. Balance
1 $250,000 8.00% $20,000 $270,000
2 $270,000 0.00% $0 $270,000
3 $270,000 8.00% $21,600 $291,600
4 $291,600 0.00% $0 $291,600
5 $291,600 8.00% $23,328 $314,928
6 $314,928 0.00% $0 $314,928
7 $314,928 8.00% $25,194 $340,122
8 $340,122 0.00% $0 $340,122
9 $340,122 8.00% $27,210 $367,332
10 $367,332 0.00% $0 $367,332
11 $367,332 8.00% $29,387 $396,719
12 $396,719 0.00% $0 $396,719
13 $396,719 8.00% $31,737 $428,456
14 $428,456 0.00% $0 $428,456
Avg. Return 4.00%
Most people will question the difference in the ending balance. Why is the Fixed Indexed Annuity at $428,456 instead of $213,185? This is because during the bear market years, the Fixed Indexed Annuity had a zero percent return. This eliminated the -15%. The bull market years produced an 8% return.
While these examples could happen, people need to ask whether they are doing all they can to protect their assets in a fluctuating and unreliable stock market. Very few financial advisors ever want to tell their client that they earned zero percent returns when the stock market was bearish. It is much better news if the client earns 8% when the stock market is bullish. But it’s even better that, at the very least, they did not lose money when the market was at a bearish -15%.

What happens with a Fixed Indexed Annuity if the stock market is bearish at -25%?

To examine things a bit further, let’s assume that the market roller coaster ride was 25% instead of 15%. In this case, the account balance would end up being $159,125 after 14 years and the Fixed Indexed Annuity balance would remain the same, at $428,456.
You should understand all of the investment options that are available to help you build your assets for retirement. In addition, they should be informed of ways to protect their assets while increasing wealth. Financial advisors and stock brokers should inform clients of options and advise the best way to protect assets in the volatile stock market.
For more information on how Estate Street Partners can help you grow your retirment fund with Fixed Indexed Annuities please call us toll-free at (888) 938-5872. If you are calling within the Boston region please call (508) 429-0011.
Category: Financial Planning

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