Variable Annuities Or Fixed Annuities For Retirement?

We all have to plan ahead financially for our retirement years or face the unpleasant consequences of not planning ahead. But today, there are so many different retirement strategies touted in the public square that it can be hard for the uninitiated to decipher which approach is truly best.

​Life insurance can be one key component of an overall retirement strategy, as can building equity in real estate and investing in CDs, stocks, bonds, and more.

But what we want to focus on here is the controversy between two opposing retirement strategies - fixed index annuities and variable annuities. How do they differ? Which is best? And what are the potential risks and rewards?

A Look At Variable Annuities As A Retirement Strategy
Variable annuities are often presented in hard-sell sales pitches these days as a virtual investment elixir - and some agents even resort to "scare tactics" like claiming a variable annuity will protect the investor against a lawsuit or against asset seizure.

However, there are certainly legitimate variable annuities and honest sales out there too. And there are certain benefits of this type of investment, including tax-deferment of earnings, payouts that can continue for life, and a death benefit. These are definitely advantages that are not found in mutual funds, for example.

But also realize that you have to first go through the accumulation phase where you pay premiums and accumulate earnings before later reaching the distribution phase, where the annuity pays out either in a single lump sum or in regular payments.

Risks also inhere in variable annuities, however. Payouts are not guaranteed as with fixed annuities (FIAs). Variable annuities also may involve tying up your money for long periods of time or paying a 10% tax penalty and/or surrender charge. Plus, variable annuity fees can be as high as 3% per year, due to administrative fees, mortality fees (related to the death benefit), and more.

Why Fixed Annuities Are A Safer Retirement Plan
While variable annuities might be right as part of an overall retirement plan for some people, for most, fixed annuities are the better, safer option. Here's why:

• With FIAs, you get a guaranteed ROI on your invested principal. It may be more modest than variable annuities tout, but at least it's secure - and it can be substantial.
• You have the possibility of earning more than the guaranteed minimum with many FIAs.
• There are far fewer fees and other investment expenses involved with fixed annuities. By the time you've paid so many fees with variable annuities, you virtually have to earn high to recoup your investment, but FIAs give you a reasonable rate of return at a much lower cost.
• Fixed annuities generally guarantee both the principal and base rate regardless of what the market does. You don't have to worry about the ups and downs of stocks/bonds. It's less stress and less work for the investor with fixed annuities.
• A fixed annuity is required by state law to be protected 100% (dollar-for-dollar) by cash reserves by the provider.

The bottom line is simple: retirement accounts are supposed to be something you can count on and something you are planning for long term. Thus, a safer option that earns sufficient and guaranteed income is superior.

That's not to say that a limited amount of money invested in a variable annuity as an "extra" strategy to potentially supplement your basic return that you're absolutely counting on is necessarily a bad idea. But FIAs make more sense as the foundational investment at the least.
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To learn more about fixed versus variable annuities and other retirement strategies, contact Summerlin Benefits Consulting today!