Understanding Fixed and Variable Annuities

When you’re planning for retirement, it’s natural to want options that can help you feel more financially secure. Annuities are one way to create income in retirement — but not all annuities work the same way.

Two of the most common types are fixed annuities and variable annuities. Each one works a little differently, and understanding those differences can help you decide which one might be a better fit for your goals.

What Is a Fixed Annuity?

A fixed annuity is a type of annuity that offers a set interest rate for a certain period of time. It’s often chosen by people who want more predictable growth and income.

Key features of fixed annuities:

• Predictable returns: Your money can grow at a steady rate based on a fixed interest rate.
• Guaranteed minimum interest rate: Even if market conditions change, your annuity will earn at least the minimum rate specified in your contract.
• Payout options: You may be able to receive payments over time, such as monthly income during retirement.
• Tax-deferred growth: You typically don’t pay taxes on earnings until you withdraw the money.

Fixed annuities may be a good option if you’re looking for more stability and want to avoid market ups and downs.

What Is a Variable Annuity?

A variable annuity works differently. Instead of earning a fixed rate, your money is invested in subaccounts that are tied to the stock or bond markets. That means your returns can go up or down depending on how those investments perform.

Key features of variable annuities:

• Market-based growth: Your money is invested, so it has the potential to grow based on market performance.
• Higher growth potential: If the market does well, your annuity value could grow more than it would in a fixed annuity.
• More risk: Because your returns depend on the market, your account value can increase or decrease.
• Optional features: Some variable annuities offer add-ons (called riders) for an extra cost. These can help protect your income or provide other benefits.

What Do They Have in Common?

Even though fixed and variable annuities work differently, they do share some features:

• Both are long-term financial products that can be used to create retirement income.
• Both offer tax-deferred growth, meaning you don’t pay taxes on earnings until you take money out.
• Both may offer payout options, such as monthly income for a set number of years or for life.
• Both are issued by insurance companies and come with a contract that outlines the terms.

How Are They Different?

Here’s a brief comparison:

Fixed Annuity

• Growth: Based on a fixed interest rate
• Risk level: Lower risk
• Returns: More predictable
• Customization: Generally simpler
• Fees: Typically lower

Variable Annuity

• Growth: Based on market performance
• Risk level: Higher risk
• Returns: Can vary widely
• Customization: Often includes optional riders
• Fees: May include investment and rider fees

What Should You Consider?

Choosing between a fixed and variable annuity depends on your personal situation. Here are a few things to think about:

• How comfortable are you with risk? If you prefer steady growth, a fixed annuity might be a better fit. If you’re open to market ups and downs, a variable annuity could offer more growth potential.
• When do you plan to retire? If retirement is coming soon and you want to help protect your savings, a fixed annuity may offer more peace of mind. If you have more time and want to grow your money, a variable annuity might be worth considering.
• What kind of income do you want? Think about whether you want income that’s more predictable or if you’re looking for growth first, then income later.
• What other retirement savings do you have? Annuities can work alongside other tools and retirement accounts. It’s helpful to look at the full picture.

Finding the Option That Works for You

Fixed and variable annuities are both designed to help you plan for retirement, but they work in different ways. Fixed annuities can offer more stability, while variable annuities may offer more growth potential. Understanding the key features of each can help you make a more informed decision.

To learn more about WoodmenLife’s retirement options, visit WoodmenLife.org/Retirement.

Written by: Diana Henry, Senior Digital Copywriter

This blog is intended for general educational purposes only and may reference products, features, or options not currently offered by WoodmenLife. Availability of products and features can vary by company and state.
WoodmenLife, its employees, and Representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

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