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Fixed annuity vs. variable annuity: Understanding the differences

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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 sacrifice portfolio growth potential due to not having market exposure.
Both variable and fixed annuities offer a guaranteed income payout that can last a lifetime.

As you're building up your retirement savings, there are many ways to stretch your money. Annuities can be particularly useful savings tools because they guarantee an income amount for either a set period of time or for the rest of your life.

Fixed and variable annuities are two options that offer tax-deferred growth on your contributions—though they do it in different ways. You may consider a fixed annuity vs. variable annuity or both as you plot out your retirement income plan.

What is a fixed annuity?

A fixed annuity provides a guaranteed interest rate. It's considered a conservative product, offering a modest earnings that are not tied to market performance. Your contract value will increase due to the accrual of guaranteed interest earnings, meaning it won't lose value if the market experiences losses. Later, you can start an income stream that can guarantee payouts for a specified period of time or for as long as you live.

What is a variable annuity?

A variable annuity includes subaccounts invested in the stock market. Your variable annuity's investment performance will affect the size of your nest egg.

It may guarantee you'll receive a series of payouts that start when you retire and can last the rest of your life, provided you annuitize (start taking payments). When you begin taking annuity payments, they will depend on the annuity value at that time. Higher gains likely will mean higher payouts. Market losses likely will result in smaller payouts.

Both fixed & variable annuities are tax-deferred

Any interest or other gains in either type of contract are sheltered from current-year taxation; your tax liability will come when withdrawals start.

Differences between a fixed & variable annuity

Let's look at the core features of these annuities so you can decide how one or both may fit with your overall retirement strategy.


The interest rate earned on a fixed annuity contract may be guaranteed for a specific amount of time or the annuity's life. A fixed annuity’s value will not decline due to market losses—it's consistent and stable. On the other hand, variable annuity values will fluctuate with the performance of the subaccounts you elect as the markets rise and fall.

Fixed annuities provide a low-risk, guaranteed interest rate

Earnings on your fixed annuity will highly depend upon its contracted rate when purchased. For example, payout on a fixed annuity purchased when interest rates are high will most likely pay out earnings at a higher rate. Conversely, payout on a fixed annuity purchased when interest rates are low are more likely to pay out earnings at a lower rate. If the interest rate is guaranteed for the length of the contract, earnings will remain constant regardless of the markets or rate activity.

A fixed rate does not mean that fixed annuities are risk-free. Fixed annuity risks include the potential that inflation could outpace the interest rate you're earning, or that you miss out on opportunities for larger market gains.

Variable annuities let you tailor your risk level

While you can't land on a fixed rate with a variable annuity, you can choose to invest in conservative or aggressive funds tailored to your risk level. More conservative investment options, such as short-term bond funds, can help reduce volatility in your account. Since fixed annuities offer a set rate, dependent upon current interest rates, they don't offer that same flexibility.

Growth potential

Over time, interest earned in a fixed annuity may lag behind earnings in a variable annuity.

Fixed annuities offer guaranteed growth

Of the fixed annuity pros and cons, its guaranteed growth from accrued interest payments stands out. Fixed interest rates offer modest growth in exchange for their guaranteed earnings. You potentially could earn more long term by taking additional risk with a variable annuity, but you could also lose money. While fixed annuity contracts avoid market risk, their trade-off is less growth potential.

Variable annuities may grow more if the market performs well

Because a variable annuity's value is tied to the performance of your investment choices, they offer more potential for growth over the long-term. Investing your variable annuity in equity funds will provide more potential for gains.


The fees associated with variable annuities may be higher than for other annuities. Investment options, death benefits, and optional benefit guarantees that might grow your assets, also add cost. It's essential to evaluate features and associated fees to ensure that you're not spending more than you need to.

The costs associated with a fixed annuity are generally lower than a variable annuity due to less risk and fewer administration fees.

Principal protection

Because your balance is invested in market-based accounts, your variable annuity is exposed to fluctuations and your principal is not guaranteed. It is possible to lose money with a variable annuity.

Fixed annuities are not exposed to market risk since the contract's interest rate is guaranteed in the contract and your principal is protected.

Early withdrawals

You may incur penalties if you withdraw from either a fixed or variable annuity too soon. The insurance company may impose surrender charges, and the IRS may levy an early withdrawal tax penalty.

  • Surrender charges are outlined in the contract and can vary. They start at a certain percentage and then decline over time. For example, the surrender penalty may be 10% in the first year but 9% the next. Some annuities have separate surrender charge schedules for each contribution you make to the annuity.
  • Annuity earnings are subject to a 10% early withdrawal tax penalty if taken before you reach age 59½ unless an exception applies. This is imposed by the IRS and applies to all annuities.

Guaranteed lifetime income

Both fixed and variable annuities provide options for annuitizing your balance and turning it into a guaranteed stream of lifetime income.

At-a-glance comparison of variable & fixed annuities

Variable annuities
Fixed annuities
Tax-deferred growth




Fluctuates based on market performance

Fixed at a specific percentage

Principal protection



Exposure to the market



Lifetime income



Early withdrawal penalties

Potential surrender charges and taxes

Potential surrender charges and taxes

How much predictability do you want in retirement?

Many types of annuities can help you grow your money into a steady stream of income payments in retirement. You may decide to use both fixed and variable annuities. But if you're choosing one over the other, the differences matter:

  • A fixed annuity may be a better option than a variable annuity if you have a more conservative risk tolerance and you seek predictable interest and principal protection.
  • A variable annuity may be a better option if you have a higher risk tolerance and want the potential for long-term market-based growth.

Fixed and variable annuities can offer you a degree of customization when building a diverse retirement strategy. Talk with a Thrivent financial advisor to find out how fixed, variable and other types of annuities may complement your plan and help you reach your retirement goals.

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.