This is true..

“Choosing a bad Annuity, with a crediting strategy that limits your upside potential, will cause you to earn a low rate of return”

Easy Fix: Don’t work with a bad agent who sells you a bad Annuity.

To understand where this myth comes from you need to know a bit about something called Crediting Strategies.

With Indexed Annuities you experiences NONE of the losses in exchange for only earning SOME of the gains of a market index like the S&P 500. For each product you buy you will have several choices of how you earn your SOME of the market upside.

These choices fall into three, easy to understand categories: Here’s how these three strategies work:
  1. A Cap is a ceiling and says “The first fruits go to you BUT you can only earn this much and that’s it”
    • Here are three examples of what you would earn in a product with a 4% Cap:
      1. If the market went down by any amount (usually measures in one or two year periods) you would make nothing for that year but would not lose anything either
      2. If the market went up 1%, 2%, 3% or 4% you would get all of it.. in a Cap strategy you get everything UP to the Cap
      3. If the market went up 5%, 10%, 20% etc. (anything over 4%) you would only make 4%
  2. A Participation Rate is like owning a piece of a business and having a business partner. If you own 50% of a business you are entitled to 50% of the net profits
    • Here are two examples of what you would earn in a product with a 50% Participation Rate:
      1. If the market went down by any amount (usually measures in one or two year periods) you would make nothing for that year but would not lose anything either
      2. If the market went up by any amount you would get half of it WITH NO LIMIT ON UPSIDE POTENTIAL..
        [6% growth, you get 3%]
        [12% growth, you get 6%]
        [40% growth, you get 20%]
  3. A Spread or Margin strategy is the exact opposite of a Cap Strategy because the other party gets the first fruits up to the Spread or Margin (It’s really a Cap on their earnings) and YOU get everything else WITH NO LIMIT ON UPSIDE POTENTIAL
    • Here are three examples of what you would earn in product with a 3% Spread or 3% Margin strategy:
      1. If the market went down by any amount (usually measures in one or two year periods) you would make nothing for that year but would not lose anything either
      2. If the market went up 1%, 2%, or 3% THEY would get all of it. In a Spread strategy they get everything UP TO the Spread
      3. If the market went up 5%, 10%, 20% etc. (anything over 3%) you would make EVERYTHING ABOVE THE 3% SPREAD You would make 2%, 7%, 17% etc.
Because there is no limit on upside potential, and very nice averages in the 5% to 6% range, today’s best Agents are using Participation Rate and Spread strategies.

Caps are low right now so the only way to limit your upside potential would be by choosing either a product that does not offer an uncapped option or by choosing the capped option rather than one of the better choices.

I hope this short teaching helps you see that Annuities truly can have unlimited upside potential.

To your amazing retirement,

Charlie Jewett
Author, Speaker, Podcast Host and Whistle-Blower

<< Introduction

<< Annuity Myth #1: Annuities Have High Fees

<< Annuity Myth #2: Annuities will Tie Up Money and Limit Access

What you can look forward to in the next 3 weeks!

Annuity Myth #4: Annuities Pay The Agent a High Commission

Annuity Myth #5: Annuity Companies May Go Out of Business and I’ll Lose My Money

Annuity Myth #6: Annuity Companies Will Keep All of My Money If/When I Die