Annuity Performance Comparison

Today’s topic is annuity performance comparison.

That’s a heavy statement. And we need to break it down in a way that actually makes sense, because you don’t want to fall into the rabbit hole of trying to compare annuities the same way you compare mutual funds or ETFs.

When it comes to annuities, the word performance means something very different.

Key Takeaways

• Annuity performance should be measured by contractual guarantees, not projections
• Lifetime income annuity comparisons focus on the payout amount
• Multi-Year Guarantee Annuities are compared by their guaranteed interest rate
• Back-testing and hypothetical performance numbers do not apply to annuity contracts
• Age and life expectancy drive income payouts more than interest rates

Performance Means Contractual Guarantees

When people hear the word performance, they usually think about market returns.

That mindset comes from the investment world.

But when it comes to annuities, performance means contractual guarantees.

So when we do an annuity performance comparison at The Annuity Man, what we are really doing is a contractual guarantees comparison.

You are comparing the guarantees written into the contract between you and the life insurance company issuing the annuity.

That’s the performance.

Comparing Lifetime Income Annuities

Let’s say you are running quotes for lifetime income products like:

• Single Premium Immediate Annuities (SPIAs)
• Deferred Income Annuities (DIAs)
• Qualified Longevity Annuity Contracts (QLACs)
• Income Riders attached to Indexed Annuities

When comparing these products, the focus is very simple.

You run the quote based on your specific situation and compare the highest contractual guarantee available at that moment.

For lifetime income products, the performance comparison is the payout amount.

Not hypothetical projections.

Not theoretical returns.

Not back-tested scenarios.

Just the number in the contract.

Annuity quotes are like a gallon of milk.

They expire every seven to ten days unless you lock them in with an application.

What Factors Determine Lifetime Income

When comparing lifetime income annuities, the numbers depend on several factors:

• Your age
• Your spouse’s age if you choose joint income
• When the income starts
• The amount invested
• Whether the funds are IRA, non-IRA, or Roth

Life expectancy drives the pricing.

Interest rates play a minor role in comparison to life expectancy.

Some people say they are waiting for interest rates to buy lifetime income.

That’s not informed thinking.

The major pricing mechanism is life expectancy.

Comparing Multi-Year Guaranteed Annuities

With Multi-Year Guarantee Annuities (MYGAs), the comparison is also straightforward.

MYGAs are essentially the annuity industry’s version of a CD.

They provide:

• Principal protection
• A guaranteed interest rate
• No market attachment
• No annual fees

The interest rate is guaranteed for the full term.

If the account is non-IRA, the interest compounds tax-deferred.

At the end of the term, you can:

• Take your money including the interest earned
• Transfer it into another MYGA
• Move it into another annuity type without triggering a taxable event

When comparing MYGAs, performance means one thing:

The highest guaranteed interest rate for the term you want.

Why Back-Testing Annuities Makes No Sense

There is a growing cottage industry of software programs that try to compare index annuity options using past performance and projected outcomes.

Those comparisons are based on:

• Hypothetical scenarios
• Theoretical projections
• Back-tested numbers

That’s nonsense.

Annuities should never be purchased for market growth or non-guaranteed outcomes.

They should never be purchased based on hypothetical, theoretical, back-tested returns.

Those are unicorns chasing butterflies.

Market Analysis Does Not Apply to Annuities

I used to work on the securities side.

Morgan Stanley.
Dean Witter.
Paine Webber.
UBS.

Every year they would look backward and try to determine which mutual fund or money manager performed the best.

But looking backward rarely predicted future performance.

And that approach does not translate into the annuity world.

Annuities are contracts focused on the future guarantees, not the past.

Bonuses and Sales Pitches Do Not Define Performance

Some agents focus heavily on things like bonuses or percentages.

But those numbers alone do not matter.

What matters is the guaranteed outcome in the contract.

For Income Riders, the percentage bonus does not matter.

The income number matters.

That is the performance.

The Bottom Line on Annuity Performance

When comparing annuities, performance means contractual guarantees.

For lifetime income annuities, it means the payout.

For MYGAs, it means the guaranteed interest rate.

Ignore the projections, hypotheticals, and back-tested numbers.

In the annuity world, performance equals guarantees written in the contract.