A good structured annuity is a promising investment and one that shouldn’t keep you awake at night.
Prospective annuity buyers may consider the purchase of one of the three best structured annuities on the market – Athene Amplify, Equitable Structured Capital Strategies PLUS, and Brighthouse Shield Level Select 6.
If you’re scratching your head more so than usual this summer regarding which, if any, annuity to buy, you’re in good company, especially now that the Federal Reserve has said it will probably boost interest rates starting in 2023.
This suggests that fixed income annuities may be more generous down the road than they are today, and that may well give you pause. Another troubling reality is that the Federal Reserve only boosts interest rates when inflation becomes a problem – in fact, it already is – and the bull market has already slowed down accordingly and could easily lose yet more steam.
So what should a prospective annuity buyer do? He or she may consider buying a so-called structured variable annuity, which, despite its appeal, is lesser-known than other annuities. These annuities – also commonly known as buffered annuities – deserve a bigger spotlight, particularly now, because they offer both the upside potential of the stock market and downside protection in the event of a bear market.
Structured Annuities Are Different Than FIAs
True, the far more popular fixed indexed annuities (FIAs) do the same thing – but with a substantial difference. You never lose a penny with an FIA, but this comes with a stiff price. You take a substantial haircut on the percentage of the annual increase in your chosen index and may even face a cap that cuts off your gains at a specified level.
This isn’t an issue with structured annuities, which offer much more upside potential with substantial – albeit not 100% – downside protection. Barring an extended and deep multi-year bear market – a scenario extremely unlikely as the economy gathers steam – this is the way to truly come out ahead financially, without fear of taking a huge financial beating.
Prospective annuity buyers should consider the purchase of one of the three best structured annuities on the market – Athene Amplify, Equitable Structured Capital Strategies PLUS and Brighthouse Shield Level Select 6. Details about each are forthcoming. First, however, let’s consider just how big a threat inflation really is to the stock market.
Inflation is a problem – but not necessarily a big one
No question, rising interest rates have always challenged stocks. But, historically, they have not been an insurmountable challenge unless inflation got out of hand. The reason is obvious: Markets rise when the economy strengthens and profits increase. Heightened business activity almost always results in higher inflation. There is no way out, and market bulls have learned to live with it and push stocks higher.
So the question is this: Is the rise in inflation this time likely to be manageable? And the answer, unequivocally, is yes.
The Federal Reserve has repeatedly said that the sharp spike in inflation in recent months is temporary, a result of an economy heating up in the aftermath of a deep slump and hampered, in part, by supply chain shortages and unusually generous unemployment benefits for millions still out of work. This prevents some of them from working.
These issues aren’t lasting, however. Manufacturers have begun boosting output and the federal government will stop augmenting jobless benefits in September. Another issue – workers staying home because of fear of becoming victims of the Covid-19 pandemic – will abate as more people are vaccinated, albeit at a slowing rate.
Inflation has to be high to hurt stocks
Economists note that rising inflation has typically been a positive for stocks until the rate surpasses 3.5% to 4%.This is when worries about rising wages and their potential pressure on profit margins begin to kick in. The Federal Reserve has made it crystal clear that it will not allow this to happen. That’s why it recently announced a modestly more aggressive interest rate policy – designed, specifically, to put a lid on rising prices.
Against this backdrop, structured annuities may seem appealing to you. Here are some details on each of the aforementioned annuities:
- Athene Amplify. This has the most upside potential on the highly popular S&P 500 index and it’s the only structured annuity offering generous index participation rates; with the 6-year term on the S&P, there is a 135% participation rate. It also has the most downside protection because it offers “floors,” as well as “buffers.” A buffer protects investors from the first 10 percentage point decline in the underlying index and mitigates declines thereafter. If the S&P 500 declines 9% one year, for instance, Athene Amplify owners who choose this buffer lose nothing. Should the S&P 500 decline 20% in a year, their loss is only 10%.
With a floor, unlike a buffer, owners would typically absorb the first 10 percentage point loss in an index in a given year. Athene would absorb all losses, if any, after that. Essentially, a floor is catastrophic loss insurance.
Like most structured annuities, Athene Amplify contracts have a six year life. Owners can invest in the S&P 500, the smaller stock Russell 2000 or the international MSCI EAFE index – and in the case of Athene Amplify, all three indexes together in an option called “Performance Blend.” If you want to choose from the indices individually, you can use 1, 2, or 6-year terms. However, the Performance Blend is only available with a 6-year term. A significant benefit to choosing a 6-year term is that the participation rates remain constant through the entirety of the contract. A number of Athene Amplify index participation rates exceed 100% and most buffers have no cap rates. In some cases, buffer rates as high as 20% are available. Floor caps are limited to 10%.
Unlike most competitors, Athene Amplify charges an annual fee of 0.95%.
The minimum investment is $10,000.
- Equitable Structured Capital Strategies PLUS. Equitable often caps participation rates, but not in the case of a six-year investment in the S&P 500 or the MSCI EAFE index, when using the 10% buffer. It offers buffers as high as 30% on all six year index investments.
In one year investments, its index caps, while higher than caps in FIAs, are still somewhat restrictive. The cap on a one year investment in the S&P 500, for example, is 10%, and even lower than that on the MSCI EAFE index.
The Equitable structured annuity does offer some additional and attractive investment options, however. One is a so-called “step up” in one year segment investments. In exchange for accepting a lower cap – the cap on the S&P 500, for example, is 8% – investors receive the capped amount if the index isn’t negative for the year. So if, say, the S&P 500 rises only 1% in a given year, investors would still get an 8% return.
A roughly similar Equitable option is called “dual direction,” available on six-year investments in the S&P 500. In this case, investors receive a good return even if the index drops over the six year period, as long as the decline doesn’t exceed the buffer rate. So if, for instance, you signed on to a 10% buffer on the S&P 500, you would still get a capped 150% return over six years if the S&P 500 wound up declining, say, 9% over that period.
The minimum investment is $25,000.
- Brighthouse Shield Level Select 6. If you prefer to invest for less than six years, this is the only structured annuity in this group that meets your needs. (Six year Brighthouse investments offer the greatest investment potential, however).
Brighthouse investments are all capped, but the cap is generous. Six year investments in the S&P 500 and MSCI EAFE index, for instance, are each capped at a 300% return over six years. A three-year investment in the S&P 500 is capped at a still generous 70%.
Like Equitable, the Brighthouse structured annuity also offers a step rate option, one that is often more generous. A one-year return on the S&P 500, for example, is capped at 8.5%, versus 8% on the Equitable product, and the MSCI EAFE index is capped at 7.0%, compared to 7.0% on the Equitable product.
The minimum investment is $10,000.
The Upshot: Stocks are good long-term investments
Underlying all these options is the fact that an investment in the broad stock market is a good move if you stay the course. According to research by Athene, in the 92-year period stretching from 1928 through 2020, the S&P 500 posted a positive yearly return 62 times and a negative yearly return 29 times – less than half as often.
Most telling, perhaps, is that most annual downturns in the S&P 500 have not been steep. In all this time, the S&P dropped more than 20% only six times. We are looking at performance over a 3 to 6 year period, depending on the contract, not just individual drops. This means even if there is a significant drop, you have time to recover in most cases. March 2020 is a great example.
The takeaway is that a good structured annuity is a promising investment and one that shouldn’t keep you awake at night.
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