Here’s an investor who put $100,000 into an index annuity “because it can only go up with the market it can never go down” with a Guaranteed Withdrawal Income Benefit rider (GWIB).
This is a little hard to read but the initial investment (Premium) is $100,000. The client is 60 years old. There is a column for “Contract’s Anniversary Value” this is your account value. There is a column for “Cash Surrender Value” which is your account value less the cost to completely get out. In this policy the surrender charge lasts for 6 years after which the account value and cash surrender value are the same. The next column is the “Income Base”. It even has a dollar sign $ next to it but you can’t ever have that column. It is guaranteed to increase 7% or if the stock market index increases more than 7% the income base increases or “steps up” even more than the 7%. Notice the “Income Base” ever increasing up to the $145,000 then remaining $145,000. This client started taking income at age 65. His (or her) income was 5% of the income base. Pretty good. $100,000 investment left alone for 5 years and now paying $6,750 a year income. And the income can increase if the market gives good returns. As the girl on TV says “Your income can never go down it can only go UP” . Listen carefully to the TV ad. “Your income can never go down, it can only go up.” How about your account value? That’s where they’re getting the income money to give you.
Let’s see where you are at age 70.
You put the money in at age 60, started income at age 65 and now you’re 70 years old. Your income is $7250 a year and your account value is $97,658. So you’re getting good guaranteed income for life and have only a small loss. Your Income Base is $145,000, so your lifetime guaranteed income is 5% of $145,000. Can you get the $145,000 instead of the $97,658? NO!. But with 10 year bonds around 2%, $7250 a year income is GREAT!
Fast forward to age 75. You put $100,000 in 15 years ago and have had 10 years of superior income totaling $78,000 and your account value is $72,354. So you had income of $78,000 and a loss of ($27,646). What happens next is like a snowball rolling down a hill. Remember that the “fee” for the income rider is a percentage of the “Income Base” So as the “Income Base” went up, so did the fee. The fee was taken out of the account value so as the account value goes down the fee is a larger and larger percentage of “your money”.
Year Age Index change Rate Interest Account
Year 16, the index was up 6.81% and you were credited 4.37% making you $2,845 for an ending account value of … hold it….. it shows a $5,782 loss. How can you make $2,845 and your account value go down? By a lot?? And the next year you made $1,897 but somehow lost $6,731. So at age 77, you invested $100,000 have been paid income of $92,750 and have a $59,841 account value for a $40,159 loss and it looks like no matter how well the account does you are going to loss more money every year. Just for fun, what’s your real return in 17 years? About 3%
Any way, jump to age 84, when you really need the money. You have received $143,500 of income and have an account value of $10,243 which will probably be zero the next year. So most of that wonderful $143,500 of interest is a return of your own money. But … the income would continue in some of these policies and reduce in some of these when the account value goes to zero. Guaranteed Income For Life.
Just for fun, over the past 17 years, which includes the great recession and the stock market drop, investing $100,000 and taking the exact same income.. exactly the same, what would your account value be in:
Your Guaranteed Annuity Account $59,841
Investment Company of America
Franklin Income (Bond) Fund
Vanguard S&P Index Fund