WSJ article - Variable Annuities were a good investment

[ziggy29]

Great post Ziggy. I am glad you picked that time frame. If you started one in 1972 you may have gotten creamed for ten years in terms of not keeping up with inflation.

You claimed it was without risk. If it fails utterly to keep up with inflation, then, how is it risk-free?

Seems to me that the possibility of losing real purchasing power IS a very real form of risk -- risk isn't only the volatility of nominal value. Long-term cash under the mattress has a lot of inflation risk, too.

 

[REWahoo]

Pensionrecovery, perhaps you missed my question when I posted it earlier. Are you selling many EIA's these days?

 

[pensionrecovery]

REWahoo, no I did not miss your question but I wanted to answewr it correctly. It is not fair to give you an answer based on one or two individuals. I mean I have one agent who has written zero and another who wrote $1,000,000 in the first three months. What is relevant is what are your major companies doing with ALL their agents as a group?

I checked with my top two companies and they both have written a ton of business this year. Between the two of them, they have over 2.9 billion dollars in paid premium this year. They both are up 17% over the same period last year. Are a lot of EIA's being sold today? Without a doubt.

But the real boom is ahead of us. I think the next nine months will be an all time record for fixed, indexed annuity sales. Like I said in an earlier post, my number one
strategy is to place 75% of funds in my favorite EIA and the remaining 25% of the funds in a collection of gold stocks.

 

[deserat]

Sort of on topic:

I've noticed that the WSJ articles on personal finance have not been very good lately (except the one on the Rot conversion) - very generic and at times bad advice - anyone else notice this?

 

[Independent]

REWahoo, no I did not miss your question but I wanted to answewr it correctly. It is not fair to give you an answer based on one or two individuals. I mean I have one agent who has written zero and another who wrote $1,000,000 in the first three months. What is relevant is what are your major companies doing with ALL their agents as a group?

I checked with my top two companies and they both have written a ton of business this year. Between the two of them, they have over 2.9 billion dollars in paid premium this year. They both are up 17% over the same period last year. Are a lot of EIA's being sold today? Without a doubt.

But the real boom is ahead of us. I think the next nine months will be an all time record for fixed, indexed annuity sales. Like I said in an earlier post, my number one
strategy is to place 75% of funds in my favorite EIA and the remaining 25% of the funds in a collection of gold stocks.

Maybe you'd like to post the details of your favorite EIA and your backtesting here. The typical belief on this board is that the loads on deferred annuities usually outrun any benefits. That's how I lean, too, but I like to think I have an open mind.

 

[brewer12345]

Maybe you'd like to post the details of your favorite EIA and your backtesting here. The typical belief on this board is that the loads on deferred annuities usually outrun any benefits. That's how I lean, too, but I like to think I have an open mind.

Don't hold your breath.

These products are overly complicated, absurdly expensive, have huge commissions for the salescritters and have surrender penalty periods of up to 10 years. On top of that, the same strategy can be duplicated by a retail investor with 15 minutes of effort (tops). Stay away from EIAs.

 

[Rich_by_the_Bay]

How are dividend earnings credited in an EIA?

 

[FUEGO]

How are dividend earnings credited in an EIA?

Sometimes they aren't. One product I saw at the local credit union gave you the quarterly return of the SP 500 before dividends in any amount from 0% to 3%. In other words, you could get 0% in any quarter up to 3%. Throughout the year, if there were two big up quarters and two down quarters, you get 6%.

 

[kaneohe]

I thought the referenced link by OP was actually quite favorable to VAs (and by similarity,
also to EIAs). Here is another article by the same WSJ writer that balances that later article: Guaranteed Variable Annuities Aren’t as Safe as You Think - WSJ.com
The writer is still writing about VAs but
I think the same ideas would pertain to EIAs.......the guys who wrote the thick document that describes the product are probably lawyers who know much better than you how to weave document into words that you may think you understand but probably don't (at least not all of it). The one time I attempted to read such a document, I quit after I found some words to the effect that the company could change the terms at any time (after I bought it??). Too much for my simple mind.

 

[pensionrecovery]

Maybe you'd like to post the details of your favorite EIA and your backtesting here. The typical belief on this board is that the loads on deferred annuities usually outrun any benefits. That's how I lean, too, but I like to think I have an open mind.

Independent, that is a great idea. I will be happy to give you the details of my favorite EIA so you can understand how it works and what it has done. Your approach is refreshing. Too many people make opinionated statements with nothing to back it up and many take them as facts.
The post Brewer made is a good example.

I'm off to church now but I will get back later and give it a shot. I will do my best to lay out the facts and what it has done. Whether or not it is
for you or not, that is up to you. But at least you will know what it is and
be able to correctly ascertain if this particular EIA makes sense or not.

Everyone should have an open mind. But I understand that is not easy to do. Our bias and prejudices get in the way very easily and far too many financial decisions are made emotionally rather than logically.

 

[ERD50]

Everyone should have an open mind. But I understand that is not easy to do. Our bias and prejudices get in the way very easily and far too many financial decisions are made emotionally rather than logically.

Or sometimes it is just based on on experience/knowledge.

Every person who has tried to convince me that they have a perpetual motion machine has told me to keep an open mind. There is a limit.

So, fire away, but keep an open mind by not assuming we have closed minds. For me, that is RED FLAG #1. The "off to church" comment I'll count as just outside the box. Three strikes and you're out (for me)

-ERD50

 

[brewer12345]

Independent, that is a great idea. I will be happy to give you the details of my favorite EIA so you can understand how it works and what it has done. Your approach is refreshing. Too many people make opinionated statements with nothing to back it up and many take them as facts.
The post Brewer made is a good example.

Uhuh. Well, show us some facts or policy details please. I am pretty sure that your favorite EIA is the one that pays you the fattest commissions, but go ahead and lay it out.

As for my post, within the past year or so I expained how these products worked and how anyone with a brokerage account could easily replicate them and save themselves a lot of money. Any insurer who is giving a better deal than any of us could pull off by ourselves is probably a solvency risk.

 

[pensionrecovery]

An EIA (equity index annuity) is NOT a security. It is an insurance product and is
better called a fixed, indexed annuity. Like all fixed annuities, it earns an interest rate
every year. In case of index annuities, the interest rate is determined by the performance of an index, usually an equity index.

The interest rate is determined by how the Index does for a particular 12 month period. However, unlike a Variable Annuity where you can lose money if the market declines, the worst you can do with a fixed, indexed annuity is earn zero for that year. Your balance remains the same as it was at the end of the previous year.

I went to Yahoo Finance and pulled up the last ten years for the S&P 500 Index showing monthly quotes and used June figures. The table below gives you the actual quotes of each year for June. It also shows the index change from year to year and how the index changes affect the interest rate on the annuity. I used a stragegy for the index annuity of annual point to point with a 7% cap for simplicity sake. There are other strategies that we will discuss later in another post.

It is important to understand what a fixed index annuity is and what it is desgined to do before I get into the details of what I am looking for in the best indexed annuity .
I will look at the details of my favorite plan in the next post. Meanwhile, be sure and
take a good look at the table below and understand it.
DATE S&P 500 INDEX EIA INTEREST ANNUITY BALANCE
CHANGE RATE
June 1999 1372.71 $100,000.00
June 2000 1454.60 5.97% 5.97% $105,965.57
June 2001 1224.38 -15.83% 0% $105,965.57
June 2002 989.82 -19.16% 0% $105,965.57
June 2003 974.50 -1.55% 0% $105,965.57
June 2004 1140.84 17.07% 7.00% $113,383.16
June 2005 1191.33 4.43% 4.43% $118,401.14
June 2006 1270.20 6.62% 6.62% $126,239.69
June 2007 1503.62 18.38% 7.0% $135,076.47
June 2008 1280.00 -14.87% 0% $135,076.47
June 2009 912.32 -28.73% 0% $135,076.47

 

[brewer12345]

I know exactly what an EIA is. Doesn't make it a good product and doesn't mean that there is some magic that the carriers underwriting this crap can access that individuals cannot. A simple package of bonds and call options easily replicates an EIA without a huge commission to a [mod edit] agent, a ridiculously long surrender penalty period, or the credit risk one takes to the often marginal insurers writing this stuff.

 

[REWahoo]

I recall one of many prior discussions on this subject: http://www.early-retirement.org/forums/f28/how-to-replicate-an-equity-indexed-annuity-eia-34656.html

 

[pensionrecovery]

When I typed the table in the previous post, it was find in the box I typed in but when submitted, it squashed all the number together. Very hard to read but hopefully you can make it out. The bottome line is that after
10 years, the S&P 500 Index was at 912.32 down from 1372.71. The index annuity on the other hand, had increased by 35%.

The reason is that during the down years, the annuity lost nothing. The most it made in any year though was 7%. Warren Buffet said once, " if you want to get rich in the stock market, don't lose money in down years." Easier said than done. But very, very true. That is what I like about the fixed, indexed annuity. It guarantees you never lose anything in down years. And unlike VA's, there are no fees unless you add an income rider on it. (We can talk about that feature later on)

HERE IS THE THING. It is great to earn 0 when everybody else is losing their shirt. When the market turns, you get good returns but on less than 100% of your money if you have suffered losses. Now for those who are smart enough to buy low and sell high and can always time it right and follow through to avoid the losses, then BY ALL MEANS stay in the market and manage your money yourself. But those guys are few and far between if you ask me.

Now the key on the index annuity, is this: you have to be able to make good money in the up years. You will never make as much as the market makes but you can make much better than the 7% I used in the chart over the last 10 years. How? You have to have an index strategy that allow you to do that. Not every index strategy offers the variety of index strategies that you need to maximize your growth rate, imo

But let me finish up by giving you a real-life example in my next post of a person who has the right index annuity using the right strategy and I will show you how powerful it is. I will also point out what you need to look for in the right index annuity.

 

[brewer12345]

When I typed the table in the previous post, it was find in the box I typed in but when submitted, it squashed all the number together. Very hard to read but hopefully you can make it out. The bottome line is that after
10 years, the S&P 500 Index was at 912.32 down from 1372.71. The index annuity on the other hand, had increased by 35%.

The reason is that during the down years, the annuity lost nothing. The most it made in any year though was 7%. Warren Buffet said once, " if you want to get rich in the stock market, don't lose money in down years." Easier said than done. But very, very true. That is what I like about the fixed, indexed annuity. It guarantees you never lose anything in down years. And unlike VA's, there are no fees unless you add an income rider on it. (We can talk about that feature later on)

HERE IS THE THING. It is great to earn 0 when everybody else is losing their shirt. When the market turns, you get good returns but on less than 100% of your money if you have suffered losses. Now for those who are smart enough to buy low and sell high and can always time it right and follow through to avoid the losses, then BY ALL MEANS stay in the market and manage your money yourself. But those guys are few and far between if you ask me.

Now the key on the index annuity, is this: you have to be able to make good money in the up years. You will never make as much as the market makes but you can make much better than the 7% I used in the chart over the last 10 years. How? You have to have an index strategy that allow you to do that. Not every index strategy offers the variety of index strategies that you need to maximize your growth rate, imo

But let me finish up by giving you a real-life example in my next post of a person who has the right index annuity using the right strategy and I will show you how powerful it is. I will also point out what you need to look for in the right index annuity.

Ah what a shill. Just like the product itself: all sizzle, no steak.

 

[Independent]

An EIA (equity index annuity) is NOT a security. It is an insurance product and is
better called a fixed, indexed annuity. Like all fixed annuities, it earns an interest rate
every year. In case of index annuities, the interest rate is determined by the performance of an index, usually an equity index.

The interest rate is determined by how the Index does for a particular 12 month period. However, unlike a Variable Annuity where you can lose money if the market declines, the worst you can do with a fixed, indexed annuity is earn zero for that year. Your balance remains the same as it was at the end of the previous year.

I went to Yahoo Finance and pulled up the last ten years for the S&P 500 Index showing monthly quotes and used June figures. The table below gives you the actual quotes of each year for June. It also shows the index change from year to year and how the index changes affect the interest rate on the annuity. I used a stragegy for the index annuity of annual point to point with a 7% cap for simplicity sake. There are other strategies that we will discuss later in another post.

It is important to understand what a fixed index annuity is and what it is desgined to do before I get into the details of what I am looking for in the best indexed annuity .
I will look at the details of my favorite plan in the next post. Meanwhile, be sure and
take a good look at the table below and understand it.
DATE S&P 500 INDEX EIA INTEREST ANNUITY BALANCE
CHANGE RATE
June 1999 1372.71 $100,000.00
June 2000 1454.60 5.97% 5.97% $105,965.57
June 2001 1224.38 -15.83% 0% $105,965.57
June 2002 989.82 -19.16% 0% $105,965.57
June 2003 974.50 -1.55% 0% $105,965.57
June 2004 1140.84 17.07% 7.00% $113,383.16
June 2005 1191.33 4.43% 4.43% $118,401.14
June 2006 1270.20 6.62% 6.62% $126,239.69
June 2007 1503.62 18.38% 7.0% $135,076.47
June 2008 1280.00 -14.87% 0% $135,076.47
June 2009 912.32 -28.73% 0% $135,076.47

Okay, I can follow this. You've already answered Rich_in_Tampa's question - these numbers do not include dividends.

It looks like you've got more to add.

 

[kaneohe]

Please explain the liquidity features of this EIA and how it interacts with
the gains in the example you gave, i.e. can you have both the full downside
protection and limited gains shown here as well as being liquid.

 

[ERD50]

When I typed the table in the previous post, it was find in the box I typed in but when submitted, it squashed all the number together.

Tip:

Copy/paste the table into a word processor, set the font to "Courier", and then get everything lined up with spaces if needed.

Then paste that into your post, select the table and then click the "#" symbol in the list of icons above the post. It will put "[-CODE-] tags around the table, and preserve the plain mono-spaced font. Should be easy to read then.

Oh, and as mentioned, include the divs from The S&P. This can be done by using the "adjusted" column in yahoo finance. S&P still lost value during that time frame, so don't worry, your product will still look better. But at least we won't be able to call you out on this simple factual error (that happens to be in your favor ).


I'm guessing this comparison was not part of your sales pitch in 1999?


-ERD50

 

[brewer12345]

Please explain the liquidity features of this EIA and how it interacts with
the gains in the example you gave, i.e. can you have both the full downside
protection and limited gains shown here as well as being liquid.

In all of the EIAs I have ever seen, you can get liuquidity any time you like, but there is generally a 10% (+/-) surrender penalty in the first 7 to 10 years.

 

[kaneohe]

But you get the advertised protections and gains?

 

[haha]

Independent, that is a great idea. I will be happy to give you the details of my favorite EIA so you can understand how it works and what it has done. Your approach is refreshing. Too many people make opinionated statements with nothing to back it up and many take them as facts.
The post Brewer made is a good example.

Overall as an author of 11 total posts you would do better to lay off the shooting gallery stuff.

If we want to, we are completely capable of taking care of ourselves.

Ha

 

[brewer12345]

So can we add another notch to the gunbelt on this one, or is our EIA-shill-of-the-month still at it?

 

[REWahoo]

Move along, move along, nothing to see here, move along...