Image Description

Comparing Fixed Indexed Annuities to Bonds

According to a recent report, fixed indexed annuities have outperformed bonds on a consistent basis over the last 25 years due to their flexibility and innovation. Annuity Alliance has discussed how FIAs have become a retirement planning strategy that could guarantee lifetime income, and now, more consumers are choosing annuities due to the economic fluctuations in the United States.

Do you know the difference between FIAs and bonds? Both products have their principal protected, but after that commonality, FIAs have different exposures set by the specific carrier’s product. Bonds are exposed to yields.

What does that mean to you the customer? Yields currently are nearly historical lows and past bond performance is driven by decreasing yields. If the yields start increasing, then bond performance will improve. On the other hand, fixed indexed annuities leverage flexibility in exposures through multi-asset portfolios that offer higher risk adjusted returns and volatility targeted indices that allow for higher rates associated with the FIA crediting method.

The report also stated how volatility targeted equity-bond portfolio outperformed a Single A Bond portfolio in 98% of the periods analyzed. You also have to understand how tax on income is deferred until withdrawn in the case of FIAs. Corporate bond income is taxed at the ordinary rate. FIAs are less liquid than bonds prior to maturity due to their surrender charge, however 10% can be withdrawn for free each anniversary.

You can download the full report here.

Conclusions from the Report

Most financial professionals use average returns when comparing investments, but that has pitfalls. Would you cross a flowing river if I said the average depth is 3 feet? Or would you be more concerned about the maximum depth?

The same applies to core investments, especially nearing retirement when there is limited time to make back drawdowns and withdrawals crystalize the losses.

While it is true that S&P 500 delivered the highest annualized return for the period reviewed, it also suffered the worst drawdowns. FIAs provide upside participation while protecting against losses. When compared to bonds, FIAs offer a high degree of flexibility regarding the exposure type, negating the potential effect of future increases in yields.

Innovation in the FIA space over the last 10 years has resulted in an improved offering that can access a diverse range of indices with intelligent techniques to maximize upside opportunities. The report’s analysis shows a simple example of an equity-bond Risk Parity index with 5% volatility target outperformed bonds in 98% of rolling 7 year periods from January 1997 to March 2022.

Risk factors related to Fixed Index Annuities include: (a) they are illiquid, due to their long surrender schedule; (b) they are not FDIC insured and policyholders are exposed to creditworthiness of the insurance carriers; (c) they charge fees – the report has assumed 2% per year in the analysis, which is generated by the carrier from the bond portfolio they manage.

The report also assesses Fixed Index Annuities provide policyholders with “pre-packaged bonds” that are professionally managed by sophisticated insurance companies, combined with upside linked to equity markets that are less exposed to inflation than bonds.

This article is provided as education only and should not be used to make a financial decision. Each person’s situation is different. You should talk to a financial professional about your situation and Annuity Alliance can connect you with a local financial professional to discuss your retirement planning options. Annuity guarantees are backed by the claims-paying ability of the issuing insurance company.