Fixed vs. Variable Annuity Pros and Cons
When it comes to retirement, one of the biggest concerns people have is outliving their money. An annuity can help alleviate this concern by providing a payment that is guaranteed for a specific period of time--or in some cases, even for life. However, there are many kinds of annuities. Knowing which one is right for you takes an understanding of their pros and cons.
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Types
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The two major types of annuities are variable and fixed. With a fixed annuity, the insurance company guarantees a specific payment to the account holder, based upon the initial investment. With a variable annuity, the insurance company invests the initial funds in subaccounts according to the investor's choices. The performance of these accounts will make the payment higher or lower.
Time Frame
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Annuities are tax-defeered savings vehicles. As such, their earnings are not accessible without penalty until after the annuitant reaches the age of 59-1/2 years old.
Features
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A fixed annuity payment is based upon the initial investment and the payout period. Once the calculation is made, the annuitant will receive those payments without change for the life of the contract. Variable annuities allow the account owner to invest the initial premium in subaccounts, which are similar in nature to mutual funds. If those investments do well enough, the annuitant may get a higher payment than he would have in a fixed annuity.
Considerations
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Because the payment amount for a variable annuity depends upon the performance of investments, it is better-suited to those who will not be collecting income from their annuity for a long period of time. A fixed annuity is better for an investor who will need income immediately.
Warning
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Because fixed annuities do not have the overhead associated with managing investments, they are generally cheaper than variable annuities, which can have much higher expenses. The higher expenses associated with variable annuities make them a controversial investment that several financial experts (including Suze Orman and Jane Bryant Quinn) recommend against.
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