Annuities: Fixed vs. Variable Annuities

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Although not for every investor, annuities can serve as a very useful tool in one’s retirement strategy. These financial products are sometimes portrayed in the media as controversial. When implemented properly, in the right situation, they can prove to be beneficial. Despite the many type of annuities, this article is going to focus only on fixed and variable annuities. Fixed and variable annuities are two of the primary types of annuity contracts commonly used today. Although each one has its own set of risks and rewards, both contract types aim to achieve the same goal; a steady stream of income payments in retirement.

A fixed annuity is an insurance contract where the owner earns a fixed rate of return while they own the contract; usually until the annuitant dies. Both the principal and earnings are guaranteed by the insurance company and backed by its claims paying ability. The premiums paid are placed in the insurance company’s general account. This general account generates a set fixed rate of return which fixed annuities are commonly known for. It is important to note that fixed annuities are often defined by this set interest rate that is stated in the contract. A major benefit of a fixed annuity is that the interest rate can never fall below the guaranteed minimum. Another benefit of a fixed annuity is that it grows on a tax deferred basis with the ability to turn the contract value into a stream of fixed income payments. Lastly, there is no upper limit on the contributions made to the annuity contract (unless the insurance company has implemented a cap). Keep in mind that fixed annuities may not work for all investors. This is why another type of annuity exists, the variable annuity.

A variable annuity is an insurance contract which can be purchased by making either a single or a series of premium payment(s). The defining characteristic of a variable annuity is the mechanism with which the premiums are invested. Unlike a fixed annuity, a variable annuity has sub accounts. These sub accounts may incur more risk as they fluctuate in value since they are invested in a manner similar to that of a mutual fund. Variable annuities also defer taxes until withdrawal and have the ability to turn the contract value into a stream of income payments. It is important know that these income payments may fluctuate as the performance of the sub accounts tend to fluctuate. Variable annuities also have no upper limit on contributions (unless the insurance company has implemented a cap). When it comes to the annuity type that suits you best, it is very important that you consider your risk tolerance.

You might be wondering how an investment vehicle of this sort could be even remotely applicable to your retirement strategy. The answer is simple. What if you have already maxed out your annual contributions to your 401(k), IRA or all other retirement plans? Investing in an annuity now becomes one of the more viable options of increasing your future retirement income. Contact us today and learn about how an annuity may help you invest and save on your road to retirement.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

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