You have done your homework, looked into various options, and have decided that you’d like to add an annuity to your retirement investment portfolio. The question remains, should you choose a fixed annuity or a variable annuity? There is greater stability and security with a fixed one, but a variable one has the potential to really pay big if the stock market does well. Here are some of the basic differences between the two plans to help you make an educated decision.

If you are more than 20 years away from retirement age, chances are that you already have an IRA but you may be frustrated at its limitations, the most glaring of which is the IRS’s $3,000 yearly deposit cap. Adding an annuity to your IRA just makes good fiscal sense, especially since after-tax contributions made to the fund are without limits. The annuity may be opened with a one-time lump payment, but younger people will start with a modest amount then add to in the form of premiums.

Should I choose a fixed annuity?

The annuity money will most likely be paid out in a fixed or variable monthly amount back to the annuitant after retirement. It is your money, but it arrives to you in a pre-determined monthly check, much like Social Security or a pension. If you are the type of person who can only have peace of mind if you know exactly how much you’ll be receiving in 20 years, then a fixed annuity may be the option for you. Interest is earned on the principal, but the principal remains safe over time. You will be guaranteed the return of your principal tax-free, and only the interest on your principal will be taxed at the time of payout. You will know exactly how much interest you are earning at all times. A fixed annuity is the best option for conservative investors, who want safety, stability, and guarantees.

Choose I choose a variable annuity?

A variable annuity may be the right choice for you if are more of a risk-taker. There is no guaranteed interest rate or guarantee of returns as there are with a fixed annuity. In fact, unless your annuity has a contract rider that guarantees the safety of your principal against loss (at an additional yearly cost to you), there is a possibility that you may suffer considerable loss of principal.

The upside to a variable annuity, of course, is that there is the potential for substantially higher return on investment.

It is wisest to consult with an insurance agent who specializes in annuities and other retirement products to determine which option might be best for you in the long run. It is too important a decision to make without the advice of a professional who can help you to see the big picture then make an informed choice.

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