Opinion: I’m nervous about putting my retirement savings in the stock market: Are indexed annuities a good substitute?
October 23, 2019 by Dan Moisand
Q: I’m 67 and am not confident the stock market will provide me good returns through my retirement. An index annuity has been recommended to me, but I see lots of negativity about annuities. Are indexed annuities a good substitute for stocks?
A.: Sam, I do not view Equity Indexed Annuities (EIAs) or other “indexed-linked” products as a good substitute for stocks.
[Indexed annuities] are regulated as fixed insurance products and not considered an investment in the securities markets. By law, the insurance company must be conservative with the funds. The insurance company will buy bonds to cover the guaranteed rate in the contract. The guaranteed rate will be lower than what you can get from a good bond portfolio because the insurance company starts with a good bond portfolio itself and from that must cover its costs, make a profit, and have something left to buy derivatives that tie to a stock market index.
As a result, only a small portion of your purchase goes to anything that relates to the stock market. This makes it highly unlikely to produce returns competitive with stocks over a long period of time.
Wink’s note: Indexed annuities are commonly referred to as Fixed Indexed Annuities (FIA) and “Equity Indexed Annuities (EIA) is an outdated and inaccurate term. Insurance companies do not intentionally reduce indexed annuity inforce retains, simply to boost profitability.