joetaxpayer <joetaxpayer@[EMAIL PROTECTED]
> writes:
> I am hearing of indexed annuities that offer 100% participation
> (i.e. 100% of the gain in index is passed on to the account
> holder. This does not include dividends.) Also, a return of 2% as a
> floor, and 15% maximum return in a year.
First off, losing the dividends takes a *huge* hit on the
overall annual return. At the moment, it's back to around
190bp. You'd scream your head off if someone suggested
buying a stock index fund which charged that much. That's
what these guys are doing.
FWIW, I haven't seen one which had both 100% participation
(even without the divs) *and* a cap as high as 15%.
For 1.9%/yr, you could take some cash and buy some long-dated
SPY options to protect some of your down side.
Or you could put together a blended ****tfolio of stocks
and bonds and get, based on historical performance, most
of the total return with vastly less volatility, especially
if you're comparing a blended ****tfolio which includes
the dividends against an S&P500 without them. Take a
look a the history of, say, VBINX. Down only 9.5% in
2002 (less than half the downside of the SP500 even
if the SP500 included its divs), yet up 19.9% in '03
when the SP500 went up 28.5 (again, including divs).
> You can pull S&P data and run your own numbers, at least to show what
> your return would have been in the last X years. You lose return by
> giving up the dividends, and having a cap, but gain some by having a
> guaranteed minimum. If you are being offered such a product, you
> should read it to understand the exact terms.
I'd be shocked - shocked - to see such an index annuity
beat the blended, low-cost ****tfolio over the very long term.
The problem with some of the analysis is sample selection.
The last 10 years have been ugly. But even in these last
10 years, the Sp500 (with divs) has only returned about 3.5%,
that 60/40 blended index got a touch better than 5%, and
the annuity you describe (100% price, no divs, 15% cap, 2%
floor)? Let's see - if we assume the floor and cap
applies annually (it probably gets applied monthly), I get
a very rough estimate of about 6.6%/yr. Not too bad - and
a very good demonstration of why one might consider these
things. But, again, that's *very* sample specific.
(to come up with that estimate, I took approx 1.5% off
of the annual total returns of the S&P500 and then
applied the cap and floor - note some problems with this -
(a) that's not the real div yield, (b) I applied the
caps on the calendar years - the specific period may
have a huge impact on this - the floor applied to 4
of the 10 years and the cap applied to two of them -
I suspect that if you applied the cap and floor monthly,
the cap would whack away at more return because the
returns are so volatile.)
Anyway, that particular index annuity formula, at
least as I applied it, has come up pretty impressive
in an ugly 10 year period. Do you have a specific
annuity you saw with those terms? I'd like to look
at it a little more closely.
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