50+ Lifestyles

Low Returns to Continue for Decades?

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

A recent financial industry news report featured a headline of doom and gloom regarding rates of return on equities. London Business School and Credit Suisse article states for the next 20 to 30 years, annualized worldwide returns on equities will reach 3 to 4 percent and less than 1 percent on bonds. The report continues – since 1980, real returns on equities and bonds have exceeded 6 percent, but those days are over. Further, many institutions still assume unrealistic returns of 6 to 8 percent. After reviewing this article, I am reminded from another financial industry news report the S&P was up 5.2 percent in January, resulting in the best January since 1997. Over the past 16 years, the S&P averaged over 6 percent. Who do we believe? What is accurate? AND, what actions do we take? Our federal government continues to tell us the recession ended mid-year 2011. Long-term mortgage interest rates remain at a very attractive low. That’s a positive note among lots of gloom with much lower yields on interest bearing accounts.

A great man once said, “If we don’t learn from history, we are destined to repeat it.” History of the stock and mutual fund markets are consistent with volatility. Our lesson from years of continued history should be – understanding ups and downs will continue in the market. History also shows the steady consistent performance of a financial product called the annuity. History also reminds us the annuity is the most misunderstood financial product in the world. Annuities are merely financial products offered by life insurance companies. Banks offer savings accounts and certificates of deposits. Brokerage firms offer stocks, bonds, mutual funds. Life insurance companies issue annuities.

For years, the history of life insurance companies offered only two very different annuities; fixed and variable. Variable annuities are much like the stock market. Investors in variable annuities are buying shares of the variable annuity called unit value. Unit values will fluctuate, just like the share price of an individual stock or mutual fund. Unit value of a variable annuity is volatile. Fixed annuities however, guarantee the principle (or premium). Earnings on a fixed annuity are based on the rate of interest. In today’s low interest environment, interest rates on fixed annuities also remain low.

In more recent years, some life insurance companies offer a very unique financial product called the index annuity. Rate of return on this product is linked to the performance of a market index; Standard and Poor’s, Dow Jones, NASDAQ and other indices or combinations of indices. Original premium or investment in the index annuity is guaranteed and not subject to fluctuation as with a variable annuity. Rate of return on the index annuity is subject to performance of a market index linked to the annuity. A major benefit of the index annuity linked to a market is there is no link to the downside of the market index. Consequently, if the index declines, the value of the index annuity does NOT decline. Value of the index annuity will only remain level or will increase with market index increases. Unlike variable annuities or stock or mutual funds, the value of an index annuity will not decrease.

Index annuities have been around since the mid-1990s. Their returns remain very consistent and steady. A recent study released by the Wharton School of the University of Pennsylvania, indicates fixed index annuity returns are not only much more consistent than the S&P index returns, but are quite attractive as well. The study examines five-year annualized returns from 1997 to 2009, calculating industry average annuity returns based on actual returns credited by insurance carriers that offer fixed index annuities. The industry average index annuity return exceeded 4 percent in all eight of the five-year periods examined. In contrast, only three of the annualized S&P returns exceeded 4 percent, while in four of the periods, the S&P index had negative returns. Remember, the index annuity does not share in market losses. Value of the index annuity will not decline with market declines. You are welcome to a copy of this study for your own review. Call us for a no cost, no obligation copy of this very valuable and eye opening study.

It is important to remember annuities are designed for longer term investment horizons. Annuities including the index annuity have disadvantages, too. It is important to review both advantages and disadvantages of any financial product.

Fixed index annuity performance history supports consistent, steady, safe alternatives to today’s low interest rates. This performance combined with income tax benefits offer some important choices. Let’s learn from history and not repeat it. If you are currently invested in equities with your valued retirement money…now could be an ideal time to consider locking in those gains before losing those gains. Our upcoming “Discovering Alternatives” workshop will review index annuity history and strategies. See our ad below – make plans to participate in our workshop.

Welcome to spring!