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What is a variable annuity?
A variable annuity is a type of annuity that includes subaccounts invested in the stock market. No matter how its investments perform, a variable annuity can guarantee you’ll receive a series of
Your variable annuity’s investment performance may affect the size of the distributions you receive. Higher gains will likely translate into higher payouts. Lower gains—or losses—will likely result in smaller payouts.

What does a variable annuity offer?
A variable annuity offers several key features: income in retirement, potential tax-deferred investment growth based on market performance, and—depending on the contract—potential to pass money on to your heirs.
- Income in retirement. Like other annuities, a variable annuity can provide ongoing income payments during retirement.
- Investment growth potential. Variable annuities let you choose from a variety of investment options within your contract. Some people prefer this option over a fixed annuity, which grows in value based on a predetermined, fixed interest rate.
- Tax-deferred growth. As with a 401(k) or a traditional IRA, a variable annuity’s earnings are tax-deferred. That means they aren’t taxed while you’re contributing to the annuity, which may result in higher growth. Later, when you take income payments out, that money is subject to income tax.
- Potential to pass money on to your heirs. Most variable annuities also offer a standard death benefit. That's money paid to your beneficiaries if you pass away before annuity payouts begin. Optional death benefits may require a policy rider that comes with an additional cost.
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Immediate vs. deferred variable annuities
Immediate and deferred variable annuities differ based on how quickly they begin providing income.
Immediate variable annuities
An immediate variable annuity starts its payouts shortly after you put money in. You fund it with a single premium. Soon (within a year—and it may be within 30 days), it starts paying you income. That leaves little time for earnings to accumulate. Your recurring income payment amounts can change over time because they're tied to the performance of the annuity’s investment subaccounts.
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Deferred variable annuities
A deferred variable annuity requires a waiting period between the time you start putting money in and the time you receive its income stream. You can fund a deferred variable annuity with a single premium or a series of payments. Your income withdrawals begin when you retire (or at some other future date, as stated in your contract). Between the time you start making payments and the time you begin taking withdrawals, earnings can build up. Increasing your contract’s value can increase the income payments it provides. Many people use deferred variable annuities as part of their overall retirement planning strategy.
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Variable annuities vs. fixed annuities
Variable annuities differ from
When considering one or the other, some people opt for the riskier variable annuity because it may achieve a higher rate of return. However, if the market trends downward, a variable annuity could earn less than a fixed annuity—or even lose all of its value.
A fixed annuity’s guaranteed interest rate may only promise a modest return. But it protects against the possibility of loss and offers the advantage of knowing ahead of time exactly how much the annuity's value will grow.

How can you use a variable annuity?
Say you’re 15 years from retirement. You have some money saved up and invested through a 401(k) or an IRA. Perhaps you have one of each. But you’re not sure they’ll provide enough money to support you through your retirement years.
If you have a lump sum of money available—or can fit a new recurring premium payment into your budget—you could put that money into a variable annuity. That would ensure you’d receive additional income starting on a designated date (your 65th birthday, for example) and lasting the rest of your life.
Knowing your annuity’s investment performance would likely affect how much money the annuity would pay out each year, you could choose how much risk to take on. Investing more aggressively could heighten your risk for loss—but also have potential for higher returns. Investing more conservatively might limit your potential loss but generate lower earnings. Often, it makes sense to base such decisions on how your other retirement savings vehicles are invested. That can help you build a well-balanced portfolio.

When should you consider a variable annuity?
That depends on many factors, including your age, your financial goals, your retirement plans, the resources you have available, the amount of risk you wish to take on, and how long you expect to live.
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