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Annuities aren’t exactly flashy, but these retirement tools have been quietly gaining popularity over the past year, and for good reason. With inflation ticking back up over the last couple of months and interest rates still elevated, and with stock market volatility becoming the norm rather than the exception, a large number of soon-to-be retirees are trying to find ways to better secure their retirement portfolios. And, many are turning to annuities, in particular, as a safe way to lock in guaranteed retirement income.
But if you’ve started exploring your annuity options, you’ve likely run into a key question: Should you go with a fixed annuity or a variable one? After all, both annuity options are designed to provide long-term income, so they can both be worth considering as part of a well-balanced retirement portfolio. However, these two annuity options operate in very different ways, and in today’s unusual economic climate, where questions about interest rates and inflation loom large, the distinction matters more than ever.
So, is a fixed or variable annuity the smarter move this August? Here’s how each product fits into today’s climate — and how you can determine which one makes sense for your situation.
Find out how to add an annuity to your retirement portfolio today.
Is a fixed or variable annuity the better choice this August?
Both fixed and variable annuities have distinct advantages in today’s market. The better option, though, depends largely on your risk tolerance, time horizon and how you view the current interest rate environment.
Why a fixed annuity could be the better option
If you’re prioritizing safety and guaranteed returns, fixed annuities may offer a strong value proposition this month, largely due to the current interest rate environment. Because rates remain elevated, insurance companies are offering competitive fixed annuity yields right now, and it’s easy to find fixed annuities with rates of 5.5% to 6.5% or higher.
High rates aren’t the only benefit of fixed annuities, however. These types of annuities function similarly to a CD: You invest a lump sum and receive a predictable, set rate of return for a specific period. That means there’s no exposure to market or rate volatility, which can be comforting for near-retirees or conservative savers who want to lock in today’s higher rates before they fall.
In fact, many fixed annuities are outperforming traditional fixed-income options like Treasury bonds or high-yield savings accounts right now. And, the Fed has signaled that rate cuts may be coming later in the year, so locking in a solid guaranteed return this August could be a timely move.
Learn more about annuities and the benefits of buying one now.
Why a variable annuity could be the better option
Variable annuities, on the other hand, present a compelling alternative for those willing to accept market exposure in exchange for growth potential. Unlike fixed products that cap your returns, variable annuities allow you to participate in market gains through various investment sub-accounts, potentially delivering returns that far exceed what fixed rates can offer.
And, while it may seem counterintuitive, the current high-rate environment actually strengthens the case for variable annuities. As rates decline, as is expected to happen later this year, the opportunity cost of choosing guaranteed returns over market-linked growth becomes more pronounced. Variable annuities also offer more flexibility in terms of investment options and income timing, allowing you to adjust your strategy as market conditions change.
For younger investors or those with longer time horizons, variable annuities can provide inflation protection that fixed products simply cannot match. While a 5.5% guaranteed rate sounds appealing today, and while it can be a great rate over the long term, it’s still important to remember that inflation can erode purchasing power over time. But variable products, particularly those with equity exposure, historically provide better long-term inflation hedging.
How to decide which annuity is right for you
If you’re trying to decide whether a fixed or variable annuity is the better option for you, start by asking these key questions:
- What’s your risk tolerance? If you can’t risk the impact of market swings, a fixed annuity may offer the stability and peace of mind you need. If you’re comfortable with some risk for the potential of higher returns, a variable annuity could work in your favor.
- What’s your time horizon? Fixed annuities tend to be the better option for those who are closer to retirement or already retired. If you’ve got a decade or more before you need the income, a variable annuity might give your money more room to grow.
- Do you need income guarantees? Both fixed and variable annuities can offer lifetime income streams, but fixed annuities make it easier to do the math. Variable annuities can offer income riders, but they come with added complexity and cost.
- Are you comparing fees? Fees on variable annuities can be steep and should be weighed carefully against your expected return. Fixed annuities, by contrast, usually have minimal or no ongoing fees.
The bottom line
There’s not one annuity option that works best for everyone, especially in today’s economic environment. Fixed annuities could be a strong play in August for those seeking guaranteed returns before interest rates potentially fall. Variable annuities, meanwhile, may appeal to those who want to tap into the market’s upside and can tolerate the risk that comes with it.
Whether you’re approaching retirement or just trying to create future income streams, though, the key is choosing the annuity that aligns with your goals and risk comfort. And if you’re considering either this month, now is a good time to shop around, because today’s rates and market conditions won’t last forever.
