I think readers should know that you chose one of the worst, if not

thee worst, ten-year periods for the S&P 500.

Your statement misses the point. Although the majority of people may

not retire into one of the worst financial periods in history, you can

never know that beforehand. It's no different than life insurance.

Chances are good that most 30 year olds will never make use of the

term insurance they own, but you never know when you'll be one of the

unlucky few that do. The chance of loss is great enough that

individuals aren't willing to play the odds. If they were, the life

insurance AND annuity industries would be practically non-existent.

There's "cherrypicking" that's done to mislead and there's

"cherrypicking" that's done to precisely further a point. Sometimes

examining the worst case scenario is exactly appropriate.

By the by... historically, the stock market is down roughly 1 out of

every 3 years. So while the last decade may have been particularly

brutal, roughly 1/3rd of Americans will likely retire into some sort

of down market and would have done so with nearly any time period

chosen.

And just for fun, I did sit down last night and take the time to look

back over a longer period of time (I expected someone to nit-pick the

data). I started with the 70's and looked at every rolling 10 year

period up until 2009. In other words, 1970 - 1979... then 1971 -

1980.. then 1972 - 1982, etc.... The annuity came out significantly

better in almost every single rolling period. The reason is that

investors fail to realize that the stock market rarely performs close

to its historical average. If it did, the annuity wouldn't be such an

enticing offer. But instead, the market is more commonly up 30% one

year and down 20% the next. Due to those wide variations, the

"guaranteed 5% years" give the annuity a boost that the general market

can't keep up with. Errantly, investors too often apply the logic that

"the market averages X% annually, so I'm probably not going to use

that 5% guarantee too often. And I'm not paying 2% for something I

don't use". The truth is that since 1970, an annuity investor would

have employed the 5% guaranteed growth a total 15 years out of the 40

(over 35% of the time).

It's also worth noting that I used the published returns for the S&P

500 and the Barclays' Agg bond index. In reality, those are indexes

and cannot be invested in directly. Rather, one would have had to buy

VFINX, AGG, or some other proxy. Although the expense ratios and

trading costs are (presumably) small, they would have further eroded

the market returns making the annuity shine that much brighter.

Monte Carlo simulation offers a more appropriate comparison in my

opinion.

I encourage you to run one. I like them too! But I don't have the time

or expertise to run one given the unique "either/or" earnings

structure of the annuity. In order to do a comparison, you would have

to run a basic monte carlo of the market and then re-evaluate that

exact same "run" using the annuity's "market minus 2% or 5%" scheme.

You can't merely compare two separate monte carlo runs. The randomly

applied variable would need to be held constant over both runs. Quite

a difficult task.

Backtesting isn't perfect by any means (past performance is no

guarantee of future results), but it is at least indicitive of

potential reality and allows side by side comparisons.