Accumulation vs. Income Annuities: What the Illustration Doesn't Tell You
Built for Growth, or Built for Income?
By Jared Prazen · Secure Retirement Planners
If you've looked at annuities, you've probably heard the term "fixed indexed annuity." What most people don't realize is that the name covers two very different tools. One is built to grow an account. The other is built to pay you an income for life.
In this video, I walk through a real accumulation annuity illustration, show what's behind its impressive numbers, and run the income test that matters most for retirees.
[VIDEO EMBED]
One name, two very different tools
Accumulation design: built to grow an account. Income comes from withdrawals, and how long it lasts depends on how much the index credits, year after year.
Income design: built to pay a lifetime income. The amount is set by contract when you buy it. Index credits affect what's left over in the account, not the paycheck.
What's behind an 8.73% illustration
The accumulation illustration we reviewed showed an 8.73% rate every year, and a projected value near $3 million at age 92, even after withdrawals. Here's what sits underneath it:
About half the history is hypothetical. The rate comes from how six indices performed over the last 10 years. Several launched in 2023, so most of their history in that window is back-tested: calculated after the fact, not actually earned. Weighted by the allocation, about 50% of the illustrated history is back-tested.
Back-tests tend to look better than reality. In a 2012 Vanguard study of 370 new indexes, 87% beat the market in their back-tested periods. Once they went live, only 51% did.
Actual results have been lower. The same illustration reports what each strategy has credited since its index launched. Weighted the same way, that's about 3.6% a year, though several indices have only a few years of live history.
Today's rates aren't guaranteed. Participation rates as high as 180% are guaranteed only for the first term. The contract's guaranteed minimum on every strategy shown was 10%.
The income test
We ran a second illustration for the same client on an income design. It pays $88,200 a year starting at age 66, guaranteed for life by contract, even if the index credits nothing.
Asked to pay that same $88,200 a year, the accumulation design's money runs out at age 79 on its guaranteed values, and around age 85 at what its strategies have actually credited since launch. It only keeps up for life if the 8.73% illustration comes true, year after year, for decades.
There is a trade-off: with an income design, less may be left to heirs if markets disappoint. That's a choice worth making on purpose.
Three questions to ask about any annuity illustration
Is it built for growth or for income?
How much of this history is real, and what has it actually credited since launch?
What's my income if the illustration doesn't come true?
A question worth answering
If the illustration doesn't come true, what happens to your income? If you're not sure, that's exactly the conversation we have with every family we work with. Schedule a conversation: [BOOKING LINK]
Keep watching: Two Numbers, One Paycheck, on how income riders actually work. [LINK: page 3]
 | Jared Prazen is a financial advisor with Secure Retirement Planners, focused on retirement income planning for people approaching or already in retirement. He helps families build plans that cover their essential expenses with predictable income, so the rest of their money can be managed with a clear plan. More about Jared Prazen |
|---|
Hypothetical illustration: $1,000,000 with a $50,000 first-year withdrawal taken at the start of each year and raised by the prior year's inflation; 100% S&P 500 total return; no fees or taxes. Returns: S&P 500 with dividends (NYU Stern, Damodaran). Inflation: CPI-U (BLS). Indexes are unmanaged and cannot be invested in directly. Past performance does not guarantee future results. 30-year average not shown for 2000 because that period isn't complete yet. Full disclosures: [LINK: disclosures]
