I have a financial planner friend who came across a client being solicited to roll a TSP(Thrift Savings Account) into an index annuity. My friends radar went up and suggested I do a video on Index Annuities, which I’m happy to do here in this video.
Honest Look at Annuities
Now, be advised, I am a 100% fee-only, fiduciary advisor. This means I sell NO products. Thus I sell no annuities. Some may think I’m biased AGAINST these products because a lot of fee-only, fiduciary advisors, are opposed to all annuities. That is not me.
Annuities have a place in a clients toolkit for sure. In fact, there is becoming a cottage industry of academics extolling the benefits of INCOME annuities for most retirees. I’ll do a video on that in a future episode. However, in this case, after analyzing the brochure for index annuities, I simply do not see the value here, especially when it comes to rolling over ones TSP to it.
Historical Growth of an Indexed Annuity
In this video, I analyze the growth potential of an index annuity using the brochure the insurance company provides. (In part two of this series, I will analyze the income potential of the same annuity.)
It seems to me from a growth perspective, the index annuity leaves a LOT to be desired. The argument in favor of the annuity is that there is NO downside. You are guaranteed to never lose money. Unfortunately, with that guarantee, you are not coming anywhere near making the upside of the market either.
20 Year Treasury Bond Out-performed
In fact, in the example from the brochure, a client putting $100k into this annuity in 1997 would have been MUCH better off by simply purchasing a 20 Treasury bond! The 20 year Treasury is 100% guaranteed for principal, not by an insurance company mind you, but actually by the Feds themselves.
20 Year Treasury Bond Out-performed….with LESS Risk
Annuities are only as safe as the claims-paying ability of the insurance company. So, there is significant more risk in an annuity than a Government bond. Now, hindsight is ALWAYS 20-20, so there was no way to know that in 1997 the 20 Treasury bond would have outperformed the index annuity, with less risk.
However, we can use hindsight for future guidance. And given that, at least from a growth perspective, I don’t see this annuity offering much value at all. Click here for my analysis on the income side of this annuity. https://joshscandlen.com/thrift-savin…