The Difference between Fixed and Variable Annuities
Annuities are generally retirement income based assets that allow capital appreciation to grow tax free until distributions are made. They usually provide retirement income security after you quit working. In this aspect, they are great tax shelters (like an IRA) but also add wealth protection for those who wish to leave a financial gift to their heirs. In an annuity, the funds can be invested in a variety of investment types just like any other investment account.
Variable annuities allow complete flexibility to invest in any type of securities the owner deems fit. It can be invested in any of the following:
- Individual equities.
- Futures markets.
- Exchange Traded Funds (ETFs)
- Index funds (global and domestic)
- Bonds or Treasury Notes
Therefore they provide a vast array of investment opportunities, but also add greater risk when retirement income is invested in the equities markets. The investor can also choose to manage their own account, so giving control to an inexperienced investor adds even more risk. Yet, variable annuities offer significant potential for capital appreciation which is especially valuable for a retiree who is expected to live longer than the national average of the mid 70s range. Plus, they can generate added security for a person who might not have saved as much as they liked during their working years and hopes to increase the value of their annuity income.
Fixed annuities are more stringent because they invest in fixed income generating assets only. They are highly secure investment vehicles for conservative investors who wish to avoid as much risk as possible. These are often good selections for investors who are not experienced investing their own retirement funds or do not want to have a professional money manager charge a fee for their services. Another possible reason to choose a fixed annuity would be if very large amount of retirement income can provide a comfortable income from interest alone. For example, a person with 1 million dollars getting a 5% return would receive $50,000 annual pretax paycheck.
Depending upon your needs and risk tolerance, either annuity choices offer a powerful method of providing retirement income security. Any asset class that allows tax deferred growth is an obvious advantage and should be thoroughly considered for future retirees’ investment portfolio.
For the average annuity investor, a wise choice could be a blend of secured income from fixed assets and a diversified equities portfolio. As in any portfolio, diversification is the key to successful investment protection. If you think an annuity is right for you, contact your financial planner or licensed annuity agent from a reputable life insurance company.