Annuity Calculators: Can You Trust Them
Annuity Calculators are certainly not all the same. If you are shoping for an annuity it is important to be clear on what your objective is for this potential annuity. There are many different types of annuities which can seem overhwhelming but it doesn’t have to.
Annuities get a reputation for being complicatied but in reality there are just a lot of options, features and types. When done correctly this can definitely play into your favor because odds are regardless of your goals and objectives there is probably an annuity that can be tailor made just for you.
Types of Annuity Calculators
There are many different types of annuity calculators just as there are many types of annuities. Some calculations from these “calculators” can be taken with a grain of salt while other’s output results that are contractual guarantees.
The type of calculation or calculator used depends on the type of annuity you are purchasing.
Hypothetical Back-Testing vs Annuity Calculator's
If you are considering a fixed index annuity the calculation you get may likely be a hypothetical back-test.
Many of the newer index annuities link to market indexes other than the S&P 500 and many of these indexes are brand new.
As you saw above index annuity illustration go back 10 years. So how do you test the historical performance of an index that is brand new?
A hypothetically back test gives you a hypothetical percent you would have earned had you purchased the annuity 10 years ago and the index performed the way they think it will.
A hypothetical illustration is when you look back and judge the performance of a particular index before it was actually created.
For example, let’s say you are considering purchasing an indexed annuity with a 70% participation tied to the MLSB (Merrill Lynch Strategic Balanced Index). While we can’t say for sure what 70% of the performance of that index will be 7 years from now, we can run a back test to see how it would have performed the last 7 years. This is because these volatility managed indexes do not have a human component to them. The indexes are basically just an algorithm that moves money between an equity component and a fixed component depending on the level of voracity.
When shopping for a Variable Annuity it is likely you get a back test because with a variable annuity you are investing directly into the market. When you get a back test for a variable annuity all the calculator is doing is applying your fee, or any contract specifications, to the actually returns of your index.
This creates what we call a hypothetical. Most often, these hypotheticals will provide you with three potential rates of return:
- The best 10 year period
- The worst 10 year period
- The most recent 10 year period
This can be helpful because even though the worst ever 10 year period isn’t guaranteed to be the worst possible scenario, it gives you a good idea of the lower end. The same hold true for the best ever and most recent 10 year periods. Below is an example of one of these charts.
Annuity Calculators Final Thoughts
Annuity calculators are helpful tools to use when trying to get an idea of what rate of return range you might earn but they are not meant to be used as a quote or taken for anything more than a rought idea of whay you might expect.