Explore the differences between fixed and variable retirement annuities to find the best fit for your retirement planning. Understand their features, benefits, risks, and costs to make informed financial decisions that align with your goals and risk appetite.

Comparing Fixed and Variable Retirement Income Options

Understanding the Basics of Fixed and Variable Annuities

Before making a decision, it's essential to grasp how each annuity type operates and their respective benefits.

What is a fixed annuity?

A fixed annuity provides a guaranteed income stream, offering stability and predictability for retirees.

Many favor fixed annuities for their consistent payouts and safety features.

The insurer manages investment risk by allocating premiums into secure, fixed-income assets.

The payout amount depends on factors like life expectancy and the accumulated account value.

Premiums are invested mainly in bonds within the insurance company's general account.

What is a variable annuity?

Variable annuities are more intricate, linked to market-based investments such as stocks and mutual funds, promising higher growth potential along with increased risk.

Death benefits and payout levels fluctuate based on the performance of the underlying investments.

Investors allocate premiums into various sub-accounts, including equities and fixed income.

The returns are not fixed and depend heavily on market performance.

Investment options include stocks, commodities, and mutual funds, leading to varied outcomes.

Differences in payout timing and structure

Both annuities can be structured as deferred or immediate, affecting when payments commence.

Deferred options start payouts after several years or decades; immediate options begin shortly after purchase.

Benefits of fixed and variable annuities

Fixed annuities provide principal protection unless the insurer faces insolvency, ensuring security.

Variable annuities offer lifetime income, helping mitigate the risk of outliving savings.

Flexible payout choices are available in fixed annuities, including lump sums or periodic payments.

Variable annuities often include death benefits, guaranteeing beneficiaries receive funds if the account value declines or the annuitant passes away.

Fixed annuities are low-risk but depend on the insurer's financial health, whereas variable annuities involve market risk.

Fee structures and costs

Fixed annuities generally have lower fees, including surrender charges and initial commissions.

Variable annuities typically entail higher costs, such as administrative fees, fund expenses, mortality charges, and optional income riders.

How to choose the best option for retirement

Selecting the right annuity depends on individual financial goals, risk tolerance, and market outlook.

Your personal situation and retirement plans should guide your decision between fixed and variable options.