Understanding Annuity Returns: What Does an 8.5% Return Really Mean?
Take Understand What That Number Really Means Before You Buy
When someone quotes an 8.5% return on an annuity, it sounds appealing—but it’s often misleading or misunderstood. The truth is: you need to ask what type of return this is, what type of annuity it’s tied to, and what trade-offs come with it. Let’s break down the reality behind the number.
What Does “8.5% Return” Actually Mean in an Annuity?
That figure usually falls into one of four categories:
- Roll-Up Rate on an Income Rider
- Illustrated Rate on a Fixed Indexed Annuity (FIA)
- Past Performance in a Variable Annuity (VA)
- Short-Term Teaser Rate in a Fixed Annuity (like a MYGA)
Let’s explore each to understand what you’re really getting.
1. Roll-Up Rate on an Income Rider
What It Is: This is not a real investment return. The roll-up rate is a guaranteed increase in the income base used to calculate future payouts, not cash you can walk away with. It’s used with Guaranteed Lifetime Withdrawal Benefits (GLWBs).
Why It’s Unique: It guarantees income growth regardless of market performance.
Pros:
- Predictable lifetime income
- Useful for retirement income planning
Cons:
- You can’t withdraw the roll-up as a lump sum
- The income base is not your account value
Who Needs It: People who need guaranteed income they can’t outlive, especially without a pension.
Who Doesn’t Need It: Those focused on liquid growth or leaving a large lump-sum legacy.
2. Illustrated Rate on a Fixed Indexed Annuity (FIA)
What It Is: An illustrated 8.5% return may show how a fixed indexed annuity could have performed using a hypothetical strategy, usually based on favorable past index performance.
Why It’s Unique: FIAs offer principal protection with upside potential, typically tied to an index like the S&P 500.
Pros:
- No market losses
- Tax-deferred growth
- Guaranteed fixed interest rate option available annually
Cons:
- Returns are capped or limited by spreads or participation rates
- Not guaranteed or consistent
- Carrier can adjust renewal rates annually
Who Needs It: People who want growth with downside protection and no risk of loss.
Who Doesn’t Need It: Those seeking uncapped returns or complete liquidity.
3. Historical or Hypothetical Returns in a Variable Annuity
What It Is: Variable annuities offer market exposure through subaccounts. An 8.5% figure here reflects historical or projected investment returns, but your money is at risk.
Why It’s Unique: Unlike FIAs, you can lose money in down markets.
Pros:
- High growth potential
- Optional income and death benefit riders
Cons:
- High fees (often 3%+ annually)
- Market risk
- Less predictable for income planning
Who Needs It: Experienced investors willing to take risk for higher upside.
Who Doesn’t Need It: Anyone looking for guaranteed income or principal protection.
4. Multi-Year Guaranteed Annuity (MYGA) Teaser Rates
What It Is: Sometimes insurers advertise temporary short-term fixed interest rates as high as 8.5%—but often only for one year, or with restrictions.
Why It’s Unique: MYGAs function like CDs and provide a guaranteed fixed interest rate over a chosen term.
Pros:
- Predictable growth
- No fees
- Principal protection
Cons:
- High rate may drop after the first year
- Not liquid during surrender period without penalties
Who Needs It: Savers looking for bond alternatives with guaranteed returns.
Who Doesn’t Need It: Investors seeking flexible access or income riders.
Is the 8.5% Return Walk-Away Money?
Usually not. If it’s a GLWB roll-up, the number is only relevant for income calculations, not lump-sum withdrawals. If it’s an illustrated rate, it’s not guaranteed and probably not repeatable. If it’s a variable annuity, it can drop just as fast. And if it’s a MYGA, you need to ask how long the rate lasts and what happens after.
What About Insurance To Supplement or Protect Your Strategy?
- Long-Term Care Insurance: Pairs well with annuities that don’t offer income doublers or care riders.
- Life Insurance: Replaces wealth spent through annuitization or lost via lower annuity death benefits.
- Disability Insurance: Useful if income is needed pre-retirement and you become unable to work.
Final Thoughts
Don’t assume 8.5% is real return you can spend. Instead, ask:
- Is this growth guaranteed or hypothetical?
- Is this income value or walk-away value?
- What’s the surrender period or penalty?
Contact The Annuity Expert for a free consultation or quote to compare the best annuities and avoid misleading returns. We’ll help you sort out what’s real, what’s income-only, and what’s hype.
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