Have you ever asked whether it wouldn’t be wise to hire a team of outsourced accountants to handle retirement financial uncertainty? Do you struggle to comprehend the differences between fixed and variable annuities?
In this article, we’re dispelling some common myths about annuities and detailing the differences between two of the most common types: fixed and variable annuities.
To understand the differences between these annuities, one must first comprehend what an annuity is and how it functions in people’s retirement plans. The bottom line here is: annuities of all types can be beneficial. It really depends on the individual, their retirement plan, and their risk tolerance.
What Is an Annuity?
An annuity is an insurance product that provides regular, agreed-upon payments to the owner. These payments can be either for a specified period or the rest of the owner’s life. The two primary types of annuities are fixed and variable annuities. Let’s examine how fixed annuities offer some benefits over variable annuities.
What Is a Fixed Annuity?
Fixed annuities guarantee investors fixed minimum interest rates on their investments. They carry a lower risk profile than variable annuities and protect investors’ capital while they receive income payments from retirement savings.
Fixed annuities differ from fixed-indexed annuities in that fixed annuities are not tied to a stock market index. In fixed-indexed annuities, there is typically a minimum rate of return attached to the annuity and a cap. These provide guidelines for how much you can earn within a specified period.
Fixed Annuity Rates
Contrary to variable annuities, fixed annuity rates feature fixed rates of return for the contract duration. Insurance companies pay these returns from the income they generate with their internal investment portfolios. These annuity companies typically invest in low-risk investments, such as government securities and corporate bonds.
Variable annuities mean your account balance and payments fluctuate based on market performance. These products operate similarly to individual retirement accounts (IRAs). Both variable annuities and IRAs are retirement savings accounts offering tax-deferred growth for your investment.
Once you begin receiving payments, you pay income taxes at the marginal rate. Variable annuities are notable because you can make annual contributions to a tax-advantaged account, whereas IRAs and 401(k)s have strict annual contribution limits. Variable annuities might also offer add-ons, such as benefits, that traditional IRAs and other retirement accounts don’t have.
Variable Annuity Rates
Variable annuity rates of return are dictated by the investment performance in the portfolio. Most variable annuities feature sub-accounts such as mutual funds offer a mix of component investments. You can choose which subaccounts you prefer and build a portfolio that’s as aggressive or conservative as you like.
How to Select the Right Annuity for You
All annuities have contract drawbacks and fees. Investment management, administrative fees, and charges such as mortality and expense risk are common. There are additional charges for optional benefits.
Since annuities are not backed by the FDIC or federal agencies, their claims are based on subjective information. Any claims hinge on the financial strength of the company providing the annuity. Because of this, you should understand all the components that make up your contract.
Fixed and variable annuities can help policyholders generate steady income. But there are other options to consider that might make more sense in some financial situations. Whether you consider a fixed or variable annuity, you should use an expert who understands the varying types and how they apply to your situation.
Predictable Income Stream
The most glaring benefit (and the one talked about at the greatest length in this article) of fixed annuities compared to variable annuities is the predictable income stream they can provide.
Fixed annuities provide clarity on exactly how much they can provide and how much income you’ll receive that year. This can be very profitable for those nearing or in retirement when considering the predictable source of income required to maintain financial stability.
No Market Risk
Fixed annuities are not invested into the market so you don’t expose yourself to market risk. You receive a fixed rate of return regardless of what happens in the stock market.
Fixed annuities offer tax-deferred growth opportunities. which means you won’t pay taxes on your earnings until you withdraw money from the annuity.
Fixed annuities will likely have lower fees than variable annuities. This means you can keep investing more money instead of losing it to surrender charges, high management fees, and other miscellaneous drags on your nest egg.
Fixed annuities might offer protection from creditors in some states. This means that if you get sued, your annuity might be shielded from seizure by creditors.
It’s important to understand that fixed annuities often don’t offer the same growth potential as variable annuities. Variable annuities have higher returns and they offer some additional flexibility when it comes to withdrawal.
Conclusion- What Are the Benefits of Fixed Annuities Over Variable Annuities?
There are many different types of annuities with different components that feature different annuity payments. In short, there are many things to know about annuities.
You can have immediate or deferred annuities and annuities with death benefits tied to them. You can have annuities specified for retirement income and those tied to tax-deferred growth. Choosing your annuity is always difficult.
Two of the easiest types of annuities to compare are fixed and variable annuities. The benefits of fixed annuities over variable annuities primarily stem from their ability to provide a predictable, stable income in retirement. However, if you’re looking for more potential gains and are comfortable analyzing things such as market data and variable annuity offers, variable annuities might be for you.
You can always use an annuity calculator to get a rough estimate of your costs over time. But the best way to uncover the annuity that’s right for you is to consult an annuity agent. These professionals will be able to consult you on the annuities that fit your needs best.