Fixed vs Variable Annuities: Look Before You Leap
There is a wide range of different types of annuities, but they can all be classified as either fixed or variable annuities. Following is a brief explanation of each:
Fixed Annuities: Regular Payments
Just as the name implies, a fixed annuity provides a series of fixed, regular payments. The company issuing the annuity makes payments over an agreed-upon period of time (20 years, for example) or for the rest of your life.
Pro:Fixed annuities are a popular option for some retirees who want regular, predictable payments they can count on to provide retirement income. If worries about outliving your retirement savings keep you up at night, a fixed annuity might be a good way to help ensure your money will carry you through.
Con:Those same fixed payments, however, can be a drawback when you factor in inflation. For example, assume you retire at an early age and opt for fixed lifetime payments. For the first few years of retirement, these regular payments may help subsidize a comfortable lifestyle. But as inflation rises and the cost of living increases, those monthly checks may not keep pace, and you could see the purchasing power of those fixed payments erode.
Variable Annuities: Growth Potential, But Also Risk
Like a fixed annuity, a variable annuity provides regular periodic payments. The annuity company invests premiums and policyholders own “units” of the annuity, with payout based on the number of units held. But just as the value of mutual fund shares can fluctuate, so can the value of units in a variable annuity, depending on the performance of the underlying investments.
Pro:A key advantage of a variable annuity is potential for growth and higher returns in the long run. Depending on the annuity contract, you may have some control over how your money is invested—including the option to transfer money within the fund family. Further, the money in an annuity grows tax deferred until it is withdrawn. By not paying taxes on the earnings each year, more of your money is earning money.
Con:On the downside, an investment in a variable annuity exposes you to some degree of investment risk. If the underlying investments perform poorly, you could end up seeing a diminished income stream. It’s critical to research the performance history of the fund or funds being offered, as well as the fund manager.
While annuities may offer some distinct retirement planning advantages for individuals, it’s important to understand all facets of the particular annuity contract you are considering. For instance, there are fees associates with annuities (such as mortality and expense risk charges, administrative fees, contract maintenance fees and, in the case of variable annuities, underlying fund expense fees as well as fees for riders the annuity offers in addition to the basic contract), surrender charges may be associated with accessing money, and gains are taxed at ordinary income rates when withdrawn. Be sure to speak with an investment counselor for more details with regard to your particular situation.
Certain annuities are offered by prospectus. Investors should read the prospectuses carefully and consider the investment objectives, risks, charges, expenses and other information before investing.There are risks inherent in investing. Past performance is no guarantee of future results.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc. (DLA). This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities. Member FINRA & SIPC.