An Overview of Choosing Between Fixed and Variable Annuities

​Fixed and variable annuities serve as alternative investment vehicles, providing investors with options beyond traditional securities. Fixed annuities can hedge against market fluctuations, and variable annuities have the potential to generate high returns. Both fixed and variable annuities offer investors benefits tailored to specific needs.

Geopolitical and economic forces have sparked investor interest in fixed annuities. During periods of economic stability and bull markets, investors tend to invest in stocks and equities, which have a higher likelihood of yielding high returns in a high-growth market environment. However, during bear or market correction periods, investments, namely securities, decrease in value. In response, investors seek safer investments. Therefore, they may choose fixed annuities over variable ones.

Generally, insurance companies issue annuities or contracts between the issuer and the consumer, which have a predetermined rate. An annuity helps achieve specific financial goals, such as purchasing a home or saving for a child's college education.

Fixed annuities protect investors by providing guarantees on the interest rate each year of the contract. The investor funds the contract, and the insurance company conducts an actuarial analysis to determine the payments. The contract may provide for a lifetime of payments or a fixed number of years. Furthermore, some annuities allow investors to receive payments immediately or defer them for a specified period.

Fixed annuities offer investors more security than their variable counterparts because they guarantee a return, even in a volatile market, and can provide a consistent income stream. Their low-maintenance nature means that they do not require annual reviews and updates. Conversely, their drawbacks include the lack of flexibility for investors to make changes and lower returns compared to variable annuities.

Variable annuities have some complications because the issuer offers investment options, referred to as subaccounts, comprised of stocks, bonds, money markets, and other asset classes. Unlike fixed annuities, which provide a guaranteed return, the returns of variable annuities depend on the performance of the investments selected by the purchaser. Thus, it may return greater or fewer returns than a fixed annuity.

Variable annuities offer investors more investment choices and have the potential to provide higher returns than fixed annuities. When examining the entire portfolio, variable annuities can help diversify a plan that contains low-risk products. However, the variety means that investors will pay higher fees to manage their investments compared to fixed annuities, which could reduce returns. Finally, variable annuities carry more risk because they typically contain a mix of stocks, bonds, and other securities.

The best investment choice depends on the investor's financial goals and objectives. Considerations include risk tolerance, retirement window, and environmental factors, such as inflation. Conservative investors may opt for fixed annuities that come with guarantees and lower fees than those with a high-risk profile. Those who can withstand market fluctuations in the stock market are willing to pay extra costs and invest in variable annuities. Furthermore, someone with a short time horizon for retirement might opt for a fixed annuity to guarantee savings toward their portfolio compared to someone with a greater time horizon, which mitigates market volatility.

Gary Begnaud

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