Fixed vs Variable Annuities
When you are young and strong, you are not really worried about your future as you are earning and fulfilling all the requirements of your family. But the way prices of commodities are rising, the really smart ones are those who take the decision of investing a part of their income into saving instruments known as annuities that guarantee them regular income after their retirement. Life after retirement is going to be tough and no one knows this better who has retired without having invested for the future. With no regular income and inflation eating up your savings, life is one hell trying to maintain the standard of living you are accustomed to. Fixed and variable are two main types of annuities and most of the people are not aware of the features of these financial instruments. This article attempts to highlight the differences between fixed and variable annuities to enable people to choose an type of annuity that better suits your requirements.
Annuities are schemes run by insurance companies and when you buy an annuity, you agree to provide the insurer with a lump sum amount or agree to pay a sum of money every month for a specified period of time. In return, the insurance company agrees to pay you either a fixed or a variable sum of monthly payments beginning at a mutually agreed date that normally starts after you retire. Annuities provide earnings that are tax deferred and you need to pay taxes like ordinary income. However, there is a provision of penalty if you withdraw early that is meant to deter people from withdrawing early.
In fixed annuities, as the name implies, the insurer agrees to pay you a fixed monthly payment after a specified date which is usually your retirement date. These payments typically last for a period that is mentioned in the document or they can last your lifetime. You can even include your spouse as beneficiary who continues to receive monthly payments after your death.
In variable annuities, you choose to invest your payment in different investment schemes though most go with mutual funds. Your monthly payment after retirement here is not fixed but is variable and goes up and down depending upon the performance of your investments.
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Fixed Annuity vs Variable Annuity • Variable annuities are regulated by SEC while fixed annuities are not regulated by SEC • A fixed annuity works like a fixed deposit while a variable annuity works more like a mutual fund • Fixed annuity provides more security as you are assured of a fixed amount after retirement. On the other hand, you are prepared to take risks which is why you also stand to gain much more than a fixed annuity • Choosing between fixed and variable annuity depends upon what sort of a personality you have. If you are a sort of person who hates having changes in the monthly payout after retirement, then perhaps fixed annuities are better for you. But if you are ready to take risks in anticipation of more profits, variable annuities may be ideal for you. • If you start out at a younger age, variable annuities may be better for you. But if you have taken the decision at an older age, the volatility of the market may be too much and it is better to stick with fixed annuities.
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