Do you rely on your retirement savings to keep your head above water in old age?
Over the last few years, increasing numbers of retirees and pre-retirees have gravitated towards fixed and variable annuities to help safeguard their financial futures.
Before you make your next retirement investment, you should check the fine print. There are more annuity choices today than ever before, and they don’t all work the same way.
So, if you’re ready to start getting acquainted with the basics of annuities and what sets fixed vs variable annuity apart, then you’ve come to the right place.
The Different Types of Annuities
An annuity is a financial product that pays out a fixed stream of payments to the annuitant, typically for a certain period of time.
There are two main types of annuities: fixed and variable.
What Is a Fixed Annuity?
A fixed annuity pays the same amount each period, regardless of how the underlying investments perform.
What Is a Variable Annuity?
A variable annuity pays out an amount that can vary, depending on the performance of the investments within the annuity.
The main difference between these two is their structure and the level of risk involved. Each has its own benefits and drawbacks, and it is important to carefully consider all options before making a decision.
What Are the Benefits and Risks of a Fixed Annuity
One of the benefits of a fixed annuity is a “guaranteed” stream of income for life, which makes them appealing to retirees who are concerned about outliving their savings.
A fixed annuity pays a guaranteed level of interest, and guaranteed payments for as long as you live. This can provide peace of mind, especially if you’re retired or close to retirement.
However, when it comes to risks of fixed annuities, some of the biggest drawbacks include early withdrawal penalties, high fees, and low rates of return. For instance, if you withdraw money from your annuity before the maturity date, you are subject to an early withdrawal penalty.
Fixed annuities offer low rates of return, which may not keep pace with inflation.
What Are the Benefits and Risks of a Variable Annuity
A variable annuity gives the investor the opportunity to invest their money in a variety of different investment options. The main benefit is that it offers the potential for higher returns than a fixed annuity.
The payments can go up or down depending on how the underlying investments perform. This can be a good option for investors who are willing to take on a bit more risk in exchange for the potential for higher returns.
However, it does not have a guaranteed interest rate. The interest rate and hence the payments from a variable annuity will float according to the investment performance of the underlying assets. It also have higher fees than fixed annuities.
Before making any decisions on what to choose between fixed vs variable annuity, be sure to speak with a financial advisor to see if a variable or fixed annuities is right for you.
Fixed vs Variable Annuity: Which Type Is Right for You?
So, which is right for you, fixed vs variable annuity? If you’re looking for a guaranteed income stream that you can’t outlive, a fixed annuity is a good choice. If you’re willing to take on more risk for the chance of a higher return, a variable annuity may be right for you.
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