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Fixed annuity vs. variable annuity: Pros & cons to consider

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The bottom line:

Variable annuities allow you to get exposure to the market, and payouts will depend on market performance.
Fixed annuities guarantee a minimum interest rate, but sacrifices portfolio growth potential due to not having market exposure.
Both variable and fixed annuities offer a guaranteed income payout that can last a lifetime.

Annuities can be useful tools, whether you're using them for retirement income or building your nest egg. The reassurance annuities offer can help you focus on other things during your retirement, whether that be traveling to new destinations, volunteering more often or spending more time with your loved ones.

Both fixed and variable annuities may offer a vehicle to create guaranteed income in retirement. We'll explore the differences between a fixed annuity vs. a variable annuity so you can determine if one, or both, are right for you.

Understanding variable annuities

A variable annuity is a tax-deferred annuity contract that invests your money in the market using subaccounts (similar to stocks, bonds and other securities). As a result, variable annuities will gain and lose value as markets fluctuate.

When you are ready to begin your retirement income, the annuity value at that time can be turned into a guaranteed payout stream. This series of payouts can be structured to last for a certain number of years or throughout your lifetime.

Pros of variable annuities

Variable annuities may offer the potential for long-term growth.

They also provide:

  • Tax-deferred growth of earnings. Any interest, dividends, or other gains in your contract are sheltered from current-year taxation until withdrawn.
  • Guaranteed income in retirement. You have the option of converting your annuity’s value into a guaranteed stream of income. You can establish annuity payments that last for your entire life, including the life of your spouse.
  • Payouts that can increase if the market performs well. Annuity payments are based on the annuity’s value when you elect an income option. Investments might experience significant gains, but there is no guarantee of that, and you may lose money investing. If investments gain value, you have more income in retirement.
  • The potential to offset the effects of inflation over long periods. By accepting additional risk, your annuity has the potential to keep up with inflation—or even get ahead.
  • A tailored investment subaccount mix. Your contract may have numerous subaccounts to choose from, enabling you to build a portfolio that's aligned with your goals.
  • A way to transfer wealth to heirs. At your death, any remaining funds in a deferred annuity contract could pass on to beneficiaries via a death benefit.

Cons of variable annuities

The possibility for growth comes with more complexity and costs.

  • Performance will fluctuate and is based on the subaccounts you select. You can't know in advance how investments will perform. If investments lose value, you could end up with less capital to fund your income.
  • Fees may be higher than for other annuities. Investment options, death benefits, and optional benefit guarantees that might grow your assets add cost. It's essential to evaluate features and associated fees to ensure that you're not spending more than you need to.
  • Annuities typically have surrender charges. An annuity is a long-term retirement product where surrender charges may apply if you withdraw the money within a specified timeframe.

Understanding fixed annuities

Fixed annuities are typically considered conservative products and offer a more modest return when compared to the long-term growth potential of variable annuities. The tradeoff is that you gain protection of your principal, meaning you don't lose money when the market experiences losses.

A fixed annuity can provide a fixed interest rate of return so you can count on steady accumulation of assets. For example, an annuity may have a 1% minimum guaranteed rate for the life of the contract and a 3% current rate for a specified time. The current rate is generally not changed more than once every 12 months.

Pros of fixed annuities

Fixed annuities are predictable savings vehicles. They offer:

  • A reliable and predictable fixed interest rate. You will know how much you'll earn at a minimum. In some cases, you earn more than the guaranteed minimum.
  • Guaranteed income in retirement. You have the option of converting your annuity’s value into a guaranteed stream of income. You can establish annuity payments that last for your entire life, including the life of your spouse.
  • Tax-deferred growth of earnings. Any interest inside the contract is deferred for federal income tax purposes until you begin withdrawals of the funds.
  • A generally lower cost than variable annuities. Fixed annuities have less risk and administration costs, so you will see lower costs and fees in a fixed annuity contract.
  • Efficient wealth transfer. A deferred annuity contract can pay out any remaining funds to beneficiaries through a death benefit.

Cons of fixed annuities

There are tradeoffs with any product, and it's important to consider the pros and cons carefully.

  • A fixed interest rate offers modest returns. You can potentially earn more over the long term by taking more risk—but you also can lose money. Fixed contracts avoid market risk, and the tradeoff is less growth potential.
  • Might not keep up with inflation. With conservative products, you are less likely to outpace inflation over long periods.
  • Annuities typically have surrender charges. An annuity is a long-term retirement product where surrender charges may apply if you withdraw the money within a specified timeframe.

Choosing between variable & fixed annuities

Variable annuities
Fixed annuities
Tax deferral
Fixed crediting rate
Only in fixed options
Principal protection
Exposure to market upside
Lifetime income

When could a variable annuity make sense for you?

Variable annuities might make sense in the following cases:

  • You want to pursue long-term growth potential and invest in the markets. A variable annuity might be appropriate if you have a higher risk tolerance and are pursuing long-term growth. You also may benefit from tax deferral during that time. While these contracts benefit from any investment gains, they also can lose money when investments lose value.
  • You have a desire to choose investments. You can customize your annuity’s investments by selecting from a variety of variable subaccounts inside and take a level of risk you're comfortable with.

When could a fixed annuity make sense for you?

Fixed annuities might make sense under the conditions below:

  • You want predictable growth. As you grow older, you may be most comfortable in a lower risk tolerance with a fixed rate of return.
  • You want principal protection. A fixed annuity offers principal protection, and you can continue to grow your assets with a fixed rate of return without facing market fluctuations

Discover the type of annuity that fits you

Both fixed and variable annuities can play a valuable role in your retirement strategy. Either option can offer tax deferral while (ideally) growing your assets, and you can set up lifetime income payments from both contracts.

Ask yourself what factors are most important to you going forward. Do you want to take additional risks in the market, and are you OK with inevitable market downturns? Or do you prefer a more slow-and-steady approach with 100% principal protection?

Annuities can be complicated, and a careful analysis can help point you in the right direction. But you don't have to do it alone. Connect with a Thrivent financial advisor to review your retirement income strategy and see if an annuity fits your goals and needs.

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Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Investing involves risk, including the possible loss of principal. Investing in a variable annuity involves risk, including the possible loss of principal. The prospectus contains more complete information on the investment objectives, risks, charges and expenses of the variable annuity contract and underlying investment options, which investors should read and consider carefully before investing. Prospectuses are also available from your Thrivent financial professional..

Annuities are intended to be long term, particularly for retirement. Guarantees are based on the financial strength and claims-paying ability of Thrivent.

Product availability and features may vary by state.

Holding an annuity inside a tax-qualified plan does not provide any additional tax benefits.

Withdrawals and surrenders will decrease the value of your annuity and, subsequently, the income you receive. Any withdrawals in excess of 10% may be subject to a surrender charge. The taxable portion of each annuity distribution is subject to income taxation. If a taxpayer is younger than 59½ at the time of distribution, a 10% federal tax penalty will apply to the taxable portion of the distribution unless a penalty-tax exception applies.