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Fixed Annuity Example –Viewer Question on Dave Ramsey

Stan Haithcock
October 13, 2022
Fixed Annuity Example –Viewer Question on Dave Ramsey

Today's topic is on a fixed annuity example, but first, let's talk about Dave Ramsey for a second. He does a lot of videos. He did one on annuities that he got some right, and he didn’t get a lot of others.

I commented on what he was saying. We got lots of views, and comments, and many people came back and said, "Wait a minute Stan the Annuity Man®, do you not like Dave Ramsey?" No, I like Dave Ramsey. If you're listening to Dave Ramsey, or viewing or whatever, or some of your people, I am a big fan because what he's done positively in the country is he's gotten a ton of people out of debt. He gives people the framework and ways to get out of debt and become debt-free. But when it comes to annuities, he needs to hire me as the annuity spokesperson because I shoot it straight.

One of the questions I’ve seen regarding Dave is,  "How is it you refer to an indexed annuity as a CD rate when it plays in the market, generally the S&P 500 with caps of 7-10% and recently some with no caps? The real advantage of an indexed annuity is to participate in market gains while eliminating market losses. Did you miss something?"

First of all, let's take their example of the S&P 500. When you buy an indexed annuity, it's the call option, and that's what the indexed annuity is based on, a call option. And I've done a bunch of videos on this. If you want to view the playlist and go to the indexed annuity side, you can see all those videos I did. But the S&P 500 does not include dividends. Well, why is that important? Over 50% of the historical annual returns for the S&P 500 are dividend based. So when you look at the S&P 500, and you're thinking market returns, and the indexed annuity doesn't include dividends, and the dividends from the S&P make up over 50% of the market returns historically on an annual basis, then that's not market returns.

If you buy the dream, you’ll get the contractual reality.

Now, the other thing that question mentions is there were these caps. Three limiting factors on indexed annuities limit the upside: caps, spreads, and participation rates. And again, I've done videos on all of that. I've written a book on it. Either whoever wrote that question is an agent, I hope not, but he might be, or they have been fed the pitch of market upside with no downside.

It is not a stock market product. It is not a security. It is a life insurance product. Indexed annuities are life insurance products that are issued at the state level. They're fixed annuities. So the SEC and FINRA don't look at fixed indexed annuities because they're not market products; they’re not securities. And they were not designed to create market returns. They were put on the planet in 1995 to compete with normal CD returns, and now, typical MYGA type returns, Multi-Year Guarantee Annuity CD type annuity returns, which is around 2-4%.

In addition, a study that just came out that was published in Retirement Income Journal said that the annual rate of return for indexed annuities is a little less than 4%. And most studies I have seen, and there's not a lot because the industry doesn't share this information for whatever reason, have shown that the return scenario is around the 4% or less level. The good news about indexed annuities is that it’s locked in if you get a gain. It's locked in permanently at the contract anniversary date, depending on the type of option you got, a one-year option or a two-year option, three-year option. There are different links. It's a very complicated product. I know that you want to believe, and many people want to believe, these are too good to be true products.

I wish that the indexed annuity world would clean up its sales pitches. I don't blame the carriers because when they put out the products, they can't regulate what the agents say, and it's a very good sell where it sounds too good to be true that all of us would love market returns with principal protection. But it does not exist because in the typical indexed annuity world, let's just say, that you're taking an S&P 500 index, not including dividends; let’s just say it's a one-year call option. The annuity company can change the rules on the caps, spreads, and participation rates. In this case, a one-year call option every year without contacting you or me.

Give you an example. In the previous question, it's a 7% cap. That's year one. The annuity company could come back in year two, and that cap could be two, three, or four. They could change it. In other words, there could be a teaser rate at the front. Here's the other thing. Let's just say one year it does get seven, and the next year it gets zero. Okay, what is the effective rate of return? It's seven divided by two, three, and a half, which is par for the course. If you look at historical returns in the stock market, let's just look at that for a second. There are never years that are just ten straight years of up. We might be going into that at this taping with the raging bull market, but we all know it will go up and down and dip.

The other thing with an indexed annuity, typically with most of these products, the gains are locked in on the contract anniversary date. So you're kind of tied to that date. I’ll give you an example. Let's just say that you bought it May the 1st, so you get to lock in the gains hopefully the next May the 1st. But let's just say markets dip the week before May the 1st lock-in. You're not going to get that market return. So you stick to that date, which limits the returns. Most people want the too-good-to-be-true, but if you buy it under the premise that you're going to get market returns, it's just not going to happen. If you buy the dream, you’ll get the contractual reality.

And I'm not putting down indexed annuities. We sell more than almost anybody on the planet. We use them primarily as an efficient and cost-effective delivery system for an income rider, a future pension that you can turn on at your leisure whenever you want. But it's attached at the time of application to most indexed annuities. The people digging in and looking at the indexed annuities pitched in an indexed annuity sounded too good to be true. Your radar went off. You went to the bad chicken dinner, and the good steak dinner seminar, which seemed too good to be true. They're talking about all this stuff up front, bonuses, which I call candy for the stupid.

You Googled something about indexed annuity and I popped up because you want to say, "Wait a minute, I got to find out from an ejected resource, someone who sells indexed annuities but is telling the truth, what's this all about? Is it too good to be true?" The answer is no. Straight up, no.

Suppose you bought the indexed annuity with the hope that you’ll get 7- 10% returns year after year after year. In that case, you're going to find out that reality's not going to be kind to you from the standpoint of what the sales pitch said and what reality and the contractual guarantees will give you. That doesn't make indexed annuities a bad product. It just makes them oversold, over-hyped, and over-promised.

Never forget to live in reality, not the dream®, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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