Fixed vs Variable Annuity: Which Is Right for Your Retirement?
Compare fixed and variable annuities side by side. Understand the risks, returns, and fees before you commit.
Key Takeaways
- 1Fixed annuities guarantee a set interest rate - no market risk
- 2Variable annuities invest in sub-accounts - market risk but growth potential
- 3Fixed annuities have lower fees; variable annuities often 2-3%+ annually
- 4Variable annuities offer death benefits and living benefit riders
- 5Fixed annuities are simpler to understand
- 6Surrender charges apply to both (typically 5-10 years)
- 7Consider your risk tolerance, time horizon, and income needs
Annuity Basics
An annuity is a contract with an insurance company that can provide guaranteed income in retirement. The two main types are fixed and variable.
- **Tax-deferred growth**: No taxes until you withdraw
- **Insurance product**: Sold by insurance companies
- **Income option**: Can convert to guaranteed lifetime income
- **Surrender period**: Penalties for early withdrawal (typically 5-10 years)
- **Death benefits**: Can pass to beneficiaries
Fixed Annuities Explained
Fixed annuities offer guaranteed interest rates for a specified period.
- **Guaranteed rate**: Insurance company guarantees a minimum interest rate
- **No market risk**: Your principal is protected
- **Simple**: Easy to understand - similar to a CD
- **Lower returns**: Typically 3-5% in current environment
- **Types**: Traditional fixed, Fixed indexed (FIA), MYGA
Fixed Annuity Example
You invest $100,000 in a fixed annuity with 4% guaranteed rate. After 10 years: ~$148,000. No risk of loss, but returns capped.
Variable Annuities Explained
Variable annuities invest your money in sub-accounts similar to mutual funds.
- **Market exposure**: Invest in stock/bond sub-accounts
- **Growth potential**: Can earn market returns
- **Market risk**: Value can decrease in down markets
- **Riders available**: Living benefits, death benefits (additional cost)
- **Higher fees**: Typically 2-3%+ annually
Variable Annuity Risk
Unlike fixed annuities, variable annuities can lose value. A 2008-style crash can significantly reduce your account value.
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Fixed vs Variable: Side-by-Side
Compare the key features of each annuity type.
| Feature | Fixed Annuity | Variable Annuity |
|---|---|---|
| Principal protection | ✅ Guaranteed | ❌ At risk |
| Return potential | Limited (3-5%) | Higher (market-based) |
| Fees | Low (0-1%) | High (2-3%+) |
| Complexity | Simple | Complex |
| Investment control | None | Choose sub-accounts |
| Living benefit riders | Some products | Common |
| Best for | Conservative investors | Growth-seekers with long horizon |
Annuity Fee Comparison
Fees are a major differentiator between fixed and variable annuities.
| Fee Type | Fixed | Variable |
|---|---|---|
| Mortality & expense (M&E) | None or minimal | 1.0-1.5%/year |
| Investment management | Built into rate | 0.5-1.0%/year |
| Administrative | Usually none | $30-50/year |
| Rider charges | Sometimes | 0.5-1.5%/year |
| Surrender charges | 5-10 years | 5-10 years |
| **Total annual cost** | 0-1% | 2-4%+ |
Fee Drag
A 3% annual fee on a variable annuity means your investments must earn 3% just to break even. Over 20 years, this significantly impacts returns.
Which Annuity Should You Choose?
Consider your personal situation and goals.
- **Choose Fixed if**: You want guaranteed returns, are risk-averse, near retirement
- **Choose Variable if**: You want growth potential, have long time horizon, can afford the fees
- **Consider neither if**: You have high fees in other accounts, need liquidity, have good pension/SS
- **Alternative**: Consider balanced portfolio + Gold IRA for diversification without annuity fees
Annuity Alternatives: Gold IRA
Before committing to an annuity, consider whether a Gold IRA might meet your needs without the high fees and surrender periods.
- No surrender charges - more liquidity than annuities
- Physical gold as inflation protection
- No ongoing insurance company fees
- You control the asset, not an insurance company
- Can provide diversification like annuity sub-accounts
- Augusta Precious Metals explains Gold IRA vs annuity options
Frequently Asked Questions
1Can I lose money in a fixed annuity?
Generally no - the insurance company guarantees your principal. However, if you withdraw during the surrender period, you'll pay penalties. And if the insurance company fails (rare), you could lose money.
2Are variable annuity fees worth it?
It depends on the riders. If you need guaranteed income regardless of market performance, the living benefit rider may be worth the cost. But for pure investment growth, low-cost index funds often beat variable annuities.
3What about fixed indexed annuities?
Fixed indexed annuities (FIAs) are a hybrid - they offer some market-linked upside with downside protection. Returns are typically capped but you won't lose principal.
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