Comparing Fixed and Variable Retirement Annuities

Discover the key differences between fixed and variable annuities, including payout options, risk levels, and fee structures. Learn how each option fits different retirement strategies, helping you make informed financial decisions for your future income. This guide covers benefits, drawbacks, and considerations to choose the best annuity suited to your retirement plan.

Fixed versus Variable Retirement Annuities

Understanding Fixed and Variable Annuities

Before exploring the differences, it's vital to understand how each annuity type functions and their benefits.

What is a fixed annuity?

In a fixed annuity, insurance providers agree to pay a predetermined amount of income over time, ensuring stability and predictability for retirees.

Many choose fixed annuities for their reliable payouts, safety, and steadiness.

The insurer manages the performance risk by investing the premium into fixed-income assets.

The retirement payout is influenced by life expectancy and the account’s value.

The premiums are invested in bonds within the insurer’s general account.

What is a variable annuity?

Variable annuities are more complex, linked to fluctuating markets like stocks and mutual funds, offering higher potential gains but with increased risk.

The death benefits and payout levels depend on the performance of underlying investments.

The investor's premium is allocated across various risk-based sub-accounts, including stocks and bonds.

Returns are not guaranteed; they depend on market performance.

Investments include stocks, commodities, and mutual funds, leading to variable outcomes.

Key differences in payout structures

Both types can be deferred or immediate, influencing when payments start.

Deferred annuities begin payouts after years or decades, while immediate ones start soon after purchase.

Advantages of fixed and variable annuities

Fixed annuities guarantee the principal unless the insurer encounters issues, offering security.

Variable annuities provide ongoing payments over a lifetime or until the death of the beneficiary, protecting against outliving your funds.

Fixed annuities offer multiple payout options, such as lump sums or periodic withdrawals.

Variable annuities include death benefits, ensuring beneficiaries receive funds if the account value drops or the annuitant passes away.

While fixed annuities are low-risk, they carry the risk of the insurer’s insolvency.

Variable annuities are higher risk, with values affected by market fluctuations.

Fee differences between fixed and variable annuities

Fixed annuities typically have minimal fees, with charges like surrender or annual fees and commissions.

Variable annuities involve additional fees, including administrative costs, fund expenses, mortality charges, and income riders.

Choosing the best annuity option

Determining the best fixed annuity depends on individual needs, market conditions, and financial goals.

The right choice varies based on personal situations and retirement plans.