Fixed, Indexed and Variable Annuities

I spend a great deal of my time describing the basics of these 3 types of annuities when it comes to retirement planning.

A brief discussion about each helps my clients decide which is best for them; below, I will share what I share with my clients.

Fixed
This is an annuity that provides a fixed rate of return. It remains constant throughout the accumulation phase (growth). It is a slow growing, but none of your money is at risk.

Indexed
This is an annuity that has an interest rate that is tied to the market, but not in the market. Generally, it grows faster than a fixed annuity and most has low or no cost associated with the basic annuity unless you add an optional benefit like a guaranteed lifetime income even if the money runs out. This one will generally follow the growth of the S&P 500 or Russell 1000. Some indexed annuities are guaranteed so you cannot lose your money but you can gain.

Variable
This is an annuity that fluctuates in value based on whatever investment strategy is chosen/used. Your money is at risk when the market goes down and can soar if the market goes up. Fees tend to be higher with this type of annuity and the fees are usually expressed as a percentage so fees grow as your money grows.

My Thoughts--
Fixed annuities tend to leave money on the table, yet they are very safe usually. Variable annuities keep some people awake at night and are best left to those who can handle the risk of losing some or all of their retirement money. Indexed annuities are in the middle; you have safety and still are taking advantage of market growth.

Some of my clients use a 35/65 investing standard. That is, they invest 65% of their retirement funds in fixed or indexed annuities and the balance of 35% in variable annuities. Generally, my clients move their variable funds over to the indexed or fixed arena as they get nearer retirement (rollover).