Seven Steps to Financial Freedom in Retirement by Hank Parrot

Author:Hank Parrot
Language: eng
Format: epub, mobi
Publisher: John Wiley & Sons, Ltd.
Published: 2011-06-09T16:00:00+00:00

One Last Word About Indexed Annuities

Indexed Annuities have been maligned by some in the investment press who simply do not understand, or do not choose to understand, the way they work.

As illustrated in Exhibit 4.1, Three Worlds of Investing, the best solutions to attaining our financial goals will usually include all three worlds: the fixed world for safety and liquidity, the equity world for growth and future income, and the indexed world as an option for potentially higher returns than the world of safety, while still protecting your principal, and the option of future income.

In a recent article of the Journal of Financial Planning,4 the authors take on much of the misinformation reported in the financial and investment press. They cite the errors by some journalists and industry professionals in these reports wherein it is posited that the market will always outperform Indexed Annuities. They further dispel the self-serving hypotheticals used in these reports and deal with real-world returns from real-world policies. This is simply done to dispel the notion that fixed index annuities cannot be competitive with other asset classes and to further show how the structure of fixed index annuities reduce their correlation to other asset classes.

As noted in the article, “The returns of real-world index annuities analyzed in this paper outperformed the S&P 500 Index over 67 percent of the time, and outperformed a 50/50 mix of one-year Treasury bills and the S&P 500 79 percent of the time.”

The dangers in any such comparisons are data mining by selectively choosing time frames to support a particular position, and drawing any definitive conclusions based on the limited data available. For example: To cite, as many in the investment industry do, that the average stock market return based on the S&P 500 over the last 84 years is 9.9 percent somehow supports investing in the market over other options, begs the question: Of what true value is that statistic? Show of hands: “How many of you intend to stay invested in the market for the next 84 years?”

The following explanation from The Index Compendium helps bring home that most critical ingredient to investment planning—time—especially when it comes to taking income from our portfolios. I deal with this in much greater detail in the next chapter, and how it relates to portfolio design. For now, notice how much chance plays into your investment planning for retirement. I have a fiduciary responsibility to my clients, which I take very seriously. Therefore, I look at whatever investment, insurance, and banking options, or combination thereof, will best serve my clients’ needs and goals.

Exhibit 4.3 represents a graph for a 77-year-old with $100,000 who begins drawing $6,000 a year in distributions. The lines represent if they began taking returns in 2000, 2001, 2002 and so on. The numbers on the right show how much they would need in an average annual return to be able to withdraw $6,000 until they reach age 100. For instance, if this person began taking distributions in January 2000 they would require a 31.

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