What is the Difference Between Fixed and Variable Annuities?

Fixed and variable annuities are two types of financial products that can help build a predictable stream of income for retirement. They have some similarities but also significant differences:

Fixed Annuities:

• Guarantee a set interest rate over a predetermined period.
• Pay a fixed rate of return, ensuring consistent and stable income.
• Suitable for those with a low tolerance for risk and desire predictable income.
• May lose purchasing power over the years due to inflation, unless the buyer pays extra for an annuity that takes inflation into account.

Variable Annuities:

• Fluctuate with the returns on the mutual funds they are invested in, meaning the value can go up or down.
• Allow investors to choose a portfolio of mutual funds, and the performance of those funds will determine the account's growth and payout size.
• Suitable for those with a higher risk tolerance and want the potential for higher returns.
• May be more complex due to fees attached that cover the management of the investments, which could cut into your returns.

Both fixed and variable annuities offer tax-deferred growth, meaning interest or other gains are sheltered from current-year taxation until withdrawals start. When choosing between a fixed and variable annuity, it's essential to consider your risk tolerance, desired returns, and the impact of inflation. If you're risk-averse and desire predictable income, a fixed annuity may be better suited for you. If you're looking for higher return potential and can tolerate market volatility, a variable annuity might be more suitable.

Comparative Table: Fixed vs Variable Annuities

The main difference between fixed and variable annuities lies in the interest rate and the potential returns. Here is a table comparing the key features of fixed and variable annuities:

In summary, fixed annuities offer a guaranteed interest rate and more predictable returns, making them suitable for individuals with a lower risk tolerance. On the other hand, variable annuities allow for potentially higher returns but come with market volatility and investment selection risks, making them more suitable for investors with a higher risk tolerance and longer time horizons.