Are you working on your retirement plan? An annuity can provide steady income during your retirement years, making it an attractive option when planning for your financial future. However, several types of annuities are available, and figuring out which type is best for you and your family can feel a little overwhelming.
Is a fixed index annuity right for you? Or would you be better off with a variable annuity in your retirement mix? In the end, are they really all that different? If these are the kinds of questions you’ve been asking yourself recently, keep reading below. We’ll break down the three major differences between fixed index and variable annuities so that you can better understand how these options might fit into your retirement plan.
3 Major Differences Between Fixed Index Annuities and Variable Annuities
Both fixed index annuities and variable annuities offer the option to convert their accumulated value into a stream of income payments in your retirement, although the specific income options and features can vary between different annuity contracts and insurance companies.
Ultimately, the best annuity option for you depends entirely on your unique situation, time until retirement, and financial goals. That’s where the intricacies of each of these types of annuities come into play, and we know it can be a confusing choice.
You obviously want to make informed decisions that will keep you financially safe and secure in the future, but what’s right for someone else may not be exactly right for you. To help you find the best fit for your situation, let’s talk about the key differences between fixed index annuities and variable annuities.
1. They Have Different Investment Structures
In a fixed index annuity, the insurance company credits interest based on the performance of a specific market index as a whole, such as the S&P 500 or the Dow Jones Industrial Average. The annuity's growth is tied to the index's performance, but it does not directly participate in the stock market.
In contrast, a variable annuity allows the annuity owner to invest their money in a selection of underlying investment options, typically including mutual funds. The performance of these individual investments directly affects the annuity's value.
2. They Vary on Risk and Return
Fixed index annuities provide a guaranteed minimum interest rate, which protects you from market downturns and volatility. Additionally, if the chosen index performs well, the annuity's interest crediting rate may be higher, offering you increased growth potential. The downside to this is that there is usually a cap or limit on the amount of interest that can be credited to the annuity, which can limit your potential returns.
Variable annuities, on the other hand, expose you to market risk. The investment performance can lead to much higher returns than you might get with a fixed index annuity, but it also carries the potential for losses if the investments perform poorly.
3. Only One of These Options Guarantees Principal Protection
Fixed index annuities typically guarantee the return of the principal investment, regardless of market performance. This means that even if the index declines, your initial investment is protected.
In a variable annuity, there is no such principal protection guarantee. The annuity's value can fluctuate based on the performance of the underlying investments, and you are not guaranteed the return of your principal investment.
Choosing the Annuity That Is Right for You
It's crucial to understand that annuities can be quite complex financial products. The terms, conditions, and features can differ quite a bit from one contract to another, even between annuities of the same type. However, that doesn’t mean that you should ignore annuities as an option for your retirement planning. It just means that it's essential to thoroughly review the contract and fully comprehend its provisions before making any final decisions or purchases.
At Leonard Financial Solutions, we’ll listen to your needs and help you gain a clearer understanding of how annuities work, the potential benefits and risks, and how they might fit into your overall retirement portfolio. Although we’re located in Moorestown, New Jersey, we serve clients all over the nation and look forward to helping you make informed choices about your financial future.