Saving for retirement over the last 15 years has been a nightmare that has hit close to home.
When I left a previous employer in 2000, I had a 401k invested in a mutual fund with an account value of $27,000. Since then, my account value has dropped to $15,000 – twice! – even though I never withdrew from it. With the recent increase in the market (I wonder how long it will last), my account value has finally climbed back over $27,000. Talk about spinning your wheels!
When my husband left his employer in 2006, we decided to try something different – we rolled his 401k into a Fixed Indexed Annuity (or Equity Indexed Annuity).
This type of annuity is an insurance product. The account value is guaranteed by the financial security of the insurance company. Each contract has a formula by which the account value can increase by some percentage of the S&P 500 Stock Index (the details vary widely from product to product). If the S&P 500 goes down, the annuity does not lose value, it remains the same. So we can win in the good years, and not lose ground in the bad ones.
In contrast to my rollover experience, my husband’s Fixed Indexed Annuity began with an account value of $31,000 and has increased to about $43,000 over the last eight years. Not bad over the course of the Great Recession. As designed, in some years the account value did not grow at all, but in others it increased by some factor of the S&P 500 Stock Index. Most importantly, and again by design, it does not lose value.
Professors at the Wharton School of Business conducted an empirical study that confirm that Fixed Indexed Annuities work about as well in practice as they do in theory. Some quotes from the Abstract:
“Annuity returns have been competitive with alternative portfolios of stocks and bonds.”
“Their design has limited the downside returns associated with declining markets.”
“They have achieved respectable returns in more robust equity markets.”
Oh, remember that 401k rollover of mine that spent 13 years spinning its wheels? Last month, I rolled it into a Fixed Indexed Annuity.
Pat is an experienced insurance professional who has been with Lawyers Insurance since 2005. You can read more about her background on her LinkedIn profile. Contact Pat at 800.662.8843 or firstname.lastname@example.org.