Both fixed annuities and indexed annuities can offer stable retirement income, but there are some key differences to consider.
Fixed annuities are lower risk and simpler to understand. Safe & easy.
Indexed annuities offer higher potential returns and more flexibility. Riskier, but powerful.
Interest Rate
Fixed annuities provide a guaranteed interest rate over a specific period of time. This rate is set by the insurance company and remains constant for the duration of the guarantee period, generating predictable and stable returns.
Indexed annuities tie their interest rate to the performance of a market index, such as the S&P 500. The returns can vary based on market performance, but there’s also usually a minimum guaranteed interest rate that they won’t dip below. There may also be a maximum interest rate cap.
Potential Returns
Fixed annuities usually offer lower, but more consistent returns when compared to indexed annuities. They’re ideal for individuals who value consistency and prioritize stability over growth potential.
Indexed annuities have the potential for higher returns than fixed annuities, especially in strong market conditions. However, these returns are often capped or limited by participation rates and other factors.
Risk and Principal Protection
Fixed annuities offer a high level of principal protection and are generally considered low-risk investments.
Indexed annuities also provide principal protection, ensuring that your initial investment is safe even if the market index performs poorly. However, they carry slightly more risk than fixed annuities due to their market-linked component.
Complexity
Fixed annuities are generally straightforward and easier to understand.
Indexed annuities are more complex, with various terms, conditions, and methods for calculating returns. They often involve participation rates, caps, and spreads that can be difficult for the average investor to fully comprehend.
Suitability
Fixed annuities are generally suitable for those who prioritize guaranteed returns and principal protection over growth potential.
Indexed annuities may be appropriate for investors who want some exposure to market gains while still maintaining principal protection. They can be a middle ground between the safety of fixed annuities and the higher risk/reward profile of variable annuities.
Fixed Indexed Annuities
A hybrid of the two, fixed indexed annuities are designed to balance protection and consistency with opportunity for growth. As a compromise between conservative fixed annuities and more aggressive variable annuities, fixed indexed annuities can be appropriate for those seeking to boost their savings while minimizing market risk.
A popular option for fixed indexed annuities is the addition of a “payment for life” rider—also known as a guaranteed lifetime withdrawal benefit (GLWB) or lifetime income benefit rider (LIBR). These riders provide guaranteed lifetime income, but come with additional annual fees. Note that riders like this are not exclusive to fixed indexed annuities, and can be added to other types of annuities as well.
Which Annuity Should I Choose?
Choosing between a fixed annuity and an indexed annuity (and a fixed indexed annuity) depends on your risk tolerance, desire for potential returns, and comfort with complex financial products.
Fixed annuities offer more predictable returns and simplicity, while indexed annuities provide the opportunity for higher returns linked to market performance, but with more complexity and possible limitations on gains.
It’s crucial to explore all of your options and carefully evaluate the benefits, fees, and terms of each to determine which annuity aligns best with your specific situation and retirement income goals.
Not sure what to do? That’s okay. Ask an experienced Benevize agent and make a plan for your future.
