Fixed Indexed Annuities: Dissecting Performance Expectations

12 Pages Posted: 25 Jan 2022

See all articles by Steven P. Clark

Steven P. Clark

University of North Carolina (UNC) at Charlotte

Mike Dickson

University of North Carolina at Charlotte; Horizon Investments

Date Written: December 1, 2021

Abstract

In today’s low interest-rate environment, fixed income securities will not be able to deliver returns of the past. As structured solutions to the principal protection problem, fixed indexed annuities (FIA) can be effective bond replacements in a retirement portfolio through an efficient risk transfer. In this paper, we compare the performance expectations of common FIA structures and present practical comparisons given different market conditions. Simulating the various structures over time, we find that participation rates should be preferred to cap rates except in low and range-bound equity markets, which historically have been less common. We also show that volatility-controlled or 'vol-controlled' indexes should be preferred to non-vol-controlled indexes under most conditions. In either case, an FIA should be expected to considerably outperform comparable bond exposures in a range-bound or expected increasing rate environment like we have today. Finally, we show that vol-controlled FIA performance is essentially independent of the vol-control target because increasing option prices offset expected improvements in performance.

Keywords: fixed indexed annuities, retirement security, retirement income

JEL Classification: G10, G11

Suggested Citation

Clark, Steven P. and Dickson, Mike and Dickson, Mike, Fixed Indexed Annuities: Dissecting Performance Expectations (December 1, 2021). Retirement Management Journal, Vol. 10, No. 1, 2021, pp. 36-45, 2021, Available at SSRN: https://ssrn.com/abstract=4011292

Steven P. Clark (Contact Author)

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Mike Dickson

University of North Carolina at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Horizon Investments ( email )

Charlotte, NC
United States
7049193611 (Phone)
7049193611 (Fax)

HOME PAGE: http://www.horizoninvestments.com/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
39
Abstract Views
142
PlumX Metrics