I have used this simple illustration to sell lots of annuities…
People have been told over and over to buy and hold and their accounts will come back… and they do, but how does that affect someone who is retired?
Let’s assume you get a 10% rate of return on $100,000 each year for the next 3 years:
Begin with $100,000
End of 1st year $110,000
End of 2nd year $121,000
End of 3rd year $133,100
The 4th year you lose just 10%… $133,100 X 90% = $119,790.
That means your annual average rate of return is 4.5%.
Starts to make an FIA look pretty smart doesn’t it?