Pros of a Fixed
Annuity
Some savers appreciate the balance
that a fixed annuity can provide in a portfolio. “Fixed annuities are generally
better as conservative income tools,” says Sherman Standberry, a certified public
accountant and managing partner at My CPA Coach in Atlanta.
Pro: More Security
If you are looking
for something you can depend on, you may be interested in this product. “Fixed
annuities are the safest type of annuity contract in the market,” says Thomas Brock,
a CPA and expert contributor for Annuity.org. “They offer guaranteed, fixed rates of
interest and appeal to highly risk-averse investors that are uncomfortable with
volatility.”
Pro: Low Maintenance
If you want to
avoid annual reviews and changes, a fixed annuity could be a good fit. These
products provide an ongoing income stream that will be consistent. “They serve as a
set-it-and-forget-it financial product, requiring no ongoing management or
decision-making on your part,” Standberry says.
Cons of a Fixed
Annuity
Even though fixed annuities are relatively
straightforward, there are also disadvantages to these products. You’ll want to talk
to your household members before getting one to make sure they are on board.
Con: Lower Returns
Since they are
considered a low-risk and safe product, you may find that the rates attached to a
fixed annuity are lower than you’d like. As the years go by, this steady income
stream might get stretched, especially if prices rise and your income remains the
same.
Con: Less Flexibility
If you opt
for a fixed annuity, you’ll likely find that you’re not able to make changes. If,
for example, you want to access more funds 10 years into your contract, you could
face steep penalties.
What Is a Variable
Annuity?
Unlike the set rate of a fixed annuity, variable
annuities have variances tied to them. “All variable annuities are issued with some
form of a subaccount attached that is linked to investment performance,” Favorito
says. The return you receive on your funds could vary based on the market. When you
purchase a variable annuity, you’ll often be able to choose between an immediate or
deferred option. A variable immediate annuity will start to send payments to you at
the onset of the agreement. A variable deferred annuity will deliver funds after an
established timeframe.
Pros of a Variable
Annuity
If you’re interested in a product that is tied to the
market and its performance, a variable annuity could be an option. There are a
couple of advantages that you’ll frequently find in this type of retirement
strategy.
Pro: Higher Potential Returns
If
your investments perform well over time, you could end up with higher returns than
you would with safer vehicles. For those who want a diversified portfolio, adding a
variable annuity to other lower-risk products could be an option.
Pro: More Choices
If you’d like to
decide where to place your funds and what investments to make, a variable annuity
will allow you to choose from a selection. You could speak to a financial advisor to
help you make decisions related to the annuity.
Cons of a Variable
Annuity
Some savers find variable annuities to be less
attractive than other investment choices. You’ll want to think through the drawbacks
to make sure you understand what you’re committing to before buying one.
Con: Greater Risk
“Variable
annuities are the riskiest type of annuity contract because they entail investment
positions in volatile financial securities, such as stocks and bonds,” Brock says.
“This exposes investors to the very real possibility of losing principal.”
Con: More Complexity
Variable
annuities typically have fees attached that cover the management of the investments,
which could cut into your returns. In addition, you will often have more choices to
make regarding how funds are invested.
Deciding if a Fixed or Variable Annuity Is Best for
You
As you plan for your retirement years, you may want to
consider your tolerance for uncertainty. “If you are risk-averse and desire
predictable income, a fixed annuity may be better,” Standberry says. “If you’re
looking for a higher return potential and can take market volatility, a variable
annuity might be suitable.”
You’ll also want to consider the impact of inflation, as a
lower fixed rate might not be enough to keep up with rising costs over time.
“Variable annuities offer a chance to beat inflation, while you may need to buy
additional options for a fixed annuity to do so,” Standberry says.
Both types of annuities offer tax-deferred growth, but
you can expect to pay taxes at the time of withdrawal. You’ll want to look at your
current income and expected retirement budget to help you plan. You may find that
setting aside funds now will create tax advantages later when you’re in a lower
income bracket.
Source
https://money.usnews.com/money/retirement/articles/fixed-vs-variable-annuities
