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Jean, over at Small Business Boomers and of The Thriving Writer fame, submitted this question for Ask the Piggy Bank:
I’m looking at buying an annuity and I’m wondering what the difference is between a variable annuity and a fixed one.
This is an excellent question. Annuities are used as retirement income. Basically, they are savings investments that offer an annual rate of return. They are tax-deferred and pay a death benefit should you die before collecting. Like other retirement investment accounts, you can’t access them before age 59 1/2 without penalty.
Fixed annuity
When you add a fixed annuity to your retirement savings portfolio, you get a guaranteed rate of return. At the beginning of each period, you are told the rate of return, and it remains the same for that period (the period depends on the annuity). The rate of return is generally fairly low, since it is guaranteed. But it is a safer investment and can be a stable and secure way to build tax-deferred retirement savings.
Variable annuity
A variable annuity offers more flexibility. With the fixed annuity, you don’t have as much control over where the investments in the annuity are directed. A variable annuity offers that control. As a result, the return you get changes regularly. The returns can be higher than those in a fixed annuity, but you also have greater risk of loss.
Remember that annuities come with surrender charges and costs in terms of fees. Check to see how much of your investment goes to administrative fees and other charges before making your choice.
Do you have a personal finance question? Email the Piggy Bank.
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[...] Our financial consultant suggested variable annuities. Since we don’t know much about them, we’ve been doing some searching. Miranda Marquit, over at Yielding Wealth, recently answered my question about the difference between fixed and variable annuities. [...]
Glad to be of help! MM
Thanks for the answer, Miranda. This is very helpful.
Jean