Michael Kitces does an excellent job summarizing what I’ve said for a long time in his article Can Variable Annuities Really Offer Insurance Guarantees Against A Market Catastrophe? | Kitces.com.
Everyone participates in the same markets and Fama/French, two well know academics to the investing world, find no evidence that anyone has consistently (year in and year out) beat the markets. Statistically, somebody is going to be an outlier both on very good results, and for very bad results. Personal finance magazines list both kinds of managers and funds regularly each year. If you were to compare those lists to lists of years past, you’d find no consistency.
What I mean by this is that investing in the markets, either through an annuity wrapper, or directly in mutual funds, either invest in the same markets. Thus, your results come from the market mix in your allocation, and more importantly how much you save or withdraw in that basket of securities.
However, the markets as a whole shouldn’t go to zero value because that would mean everything has gone to zero value at the same time. Stop and imagine what that would mean. All businesses and their stores would stop operating. You could get no gas, food, utilities, nothing. My point here is to do as Kitces suggests in his article: broadly diversify. And I would suggest through the use of market based indexes.
Why bring this up? Because people think they need these guarantees offered by annuities. Here’s an article explaining the different kinds of guarantees people have bought. Popularity doesn’t mean they’re going to work though. Beanie Baby’s were once popular too!
Those guarantees sound good. Kitces points out, as I have, that putting everything into the hands of insurance companies is the opposite of diversification. It is concentration with dependence on that insurance company to manage that guarantee pool well. When things go bad, it goes bad for everyone in the guarantee pool at the same time. The insurance company is suddenly on the hook for all that money!
Moral of the story: Invest in a diversified way with risk exposure that is sensible to you. Realize that the key ingredient to your success isn’t in what you can’t control (markets or the economy), but instead what you can control (how much you spend or save). Spend or save go hand in hand through both the savings years and the retirement years.