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:
- 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:
- 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
- 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
- If the market went up 5%, 10%, 20% etc. (anything over 4%) you would only make 4%
- Here are three examples of what you would earn in a product with a 4% Cap:
- 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:
- 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
- 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%]
- Here are two examples of what you would earn in a product with a 50% Participation Rate:
- 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:
- 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
- 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
- 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.
- Here are three examples of what you would earn in product with a 3% Spread or 3% Margin strategy:
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
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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