Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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What is the difference between a fixed annuity and a variable annuity?

When planning for your retirement, you need to consider all dimensions of your portfolio, including annuities. There are two kinds of annuities you can buy. One is a fixed annuity and one is a variable annuity.

The difference between a fixed annuity and a variable annuity is the guaranteed rate of return you can receive from either one.

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Although one type of annuity is riskier than the other, both types of annuities come with risk. That is why it is not a good idea to plan solely on annuities for your retirement. Instead, they should be just one aspect of your investment portfolio.

Annuities are a guaranteed income for your retirement nest egg, but they are based on a big “if.” They are only guaranteed income IF you live until your annuity matures. Then you will only actually benefit from the annuity after you have received the same amount you initially invested. To learn more about how annuities work, read the next section.

How Fixed and Variable Annuities Work

An annuity is an investment option that you buy from an insurance company with an expected return for your money later in life. Insurance companies sell annuities with the gamble that you won’t outlive your annuity to its maturity. That may sound harsh, but it is the raw reality. You give the insurance company a sum of money and they promise to give it, and more, back to you someday. They would much rather keep your money instead of returning it.

Let’s say you buy a 20 year annuity for $20,000. For this example we’ll make it a fixed annuity to keep the math simple. To understand the difference between a fixed annuity and a variable annuity, see the sections below.

So, back to the example: your $20,000 annuity is going to cost you $20,000, and you can pay it off over the next 20 years. You will give the insurance company $83.33 every month until the annuity is paid. Once the paid in full annuity is eligible for payout, you will begin to receive your guaranteed monthly income.

If your guaranteed monthly income was set for $1,000 per month, then within 20 months of receiving payouts you will have recouped your expenses. Everything you receive on an ongoing basis beyond that initial return on your investment is profit.

The gamble with the annuity, then, is if you can outlive the time it will take for your investment to mature and become prosperous. If you survive long enough to start receiving profit, then the annuity paid for itself and was a worthwhile investment. If you die before that happens, then you have wasted your money on an investment that will not payout to you or to any of your dependents. The insurance company keeps all of your money.

Now that you have a better understanding of the profit and loss risk of an annuity, it is time to understand the difference in types of annuities that you have. Below you will find information on fixed annuities and variable annuities.

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Understanding a Fixed Annuity

Fixed annuities are the safer choice between the two annuities. The investment portfolio that makes up your annuity will be comprised of less risky funds to assure you receive a guaranteed return every month. Regardless of how the market fluctuates, if your guaranteed fixed annuity is set to payout $1,000 every month then you will receive $1,000 every month. The benefit to this is having a guaranteed steady income stream. The downside is not seeing an increase when the market changes.

Understanding a Variable Annuity

Variable annuities are considered to be the riskier choice of the two annuities. The investment portfolio for a variable annuity will fluctuate with the market, which makes it impossible to guarantee your monthly rate of return. Some months you may make more than you expected; other months will be less.

The benefit to the variable annuity, of course, comes when your return is high. The disadvantage can be seen during the months when your return is less than desired. If you make $2,000 some months and $500 during other months, it may all balance out to approximately $1,000 per month anyway, but there are no guarantees with a variable annuity.

Now that you understand the difference between a fixed annuity and a variable annuity, you need to decide which one makes the most sense for your lifestyle and retirement portfolio. Again, it’s not a good idea to invest everything into annuities since there is also the gamble that you may not be alive to collect your returns and your heirs won’t benefit from it either.

However, it is a good idea to invest in a little bit of everything to cover all your bases. Therefore, adding annuities to your investment plan can add some income opportunity to your future. Request online annuity quotes for different insurance plans by entering your zip code on this page now!