This is a follow-up on two previous entries that discuss the fixed indexed annuity study from Wharton Professor David Babbel.
The previous and related posts can be found here and here. Proper attribution, disclaimers and context for the study are discussed in these previous posts. It is worth noting again that the study and its slides are not intended to be used with any sales presentations.
This first set of slides looks at the performance of two fixed indexed annuities compared to a portfolio of stocks and bonds since 1995. Some context and assumptions are as follows:
The first set of slides looks at the performance of the 14 year annuity. Results begin in 1995 and can be seen in this slide for the full period ending in 2007:
Looking at specific years as start dates can highlight the dramatic impact that sequence of returns risk can have on results. For example, consider the comparative performance of the annuity if the starting year is 2000 which--in retrospect of course--represents the height of the NASDAQ bubble:
Similarly, consider the performance disparity if the start dates are at the height of the liquidity/real estate bubble in either 2006 or 2007:
Next, results for the 9 year annuity are similar, although not quite as dramatic since they do not carry through the market implosion beginning in 2008:
Last, the next 3 slides look at a comparison of the annualized return of each of the three options: the 14 year annuity, the 9 year annuity, and each of the investment alternatives. For the fixed indexed annuities, the annualized return is the premium bonus rate credited at the outset.
As seen in the following slide (which provides what is probably the most dramatic example of the effects of sequence of returns risk), there is more than a 45% difference between the annualized return of the 14 year fixed indexed annuity and the S&P 500 index over a 1 year period beginning on January 1, 2008:
The next two slides display annualized returns for each of the fixed indexed annuities over the full time span: