What is a fixed annuity vs. a variable annuity vs. an indexed annuity?

Fixed annuities: pays out a guaranteed amount for life after a certain date

  • Upside: predictability of payout amounts; insurance company assumes the risk of the performance of the investments in the annuity
  • Downside: modest annual return, generally only slightly higher than a CD

Variable annuities: pays out a fluctuating amount based on the investment performance of the mutual funds that make up your annuity account

  • Upside: potential for greater payouts
  • Downside: often criticized for their fees; relatively complex; you must pick form a menu of mutual funds (so ideally, it would be like your 401(k) investments in that you want an efficient portfolio); no guaranteed returns

Indexed annuities: pays out a guaranteed minimum, but a portion of the pay out is tied to the performance of a market index, such as the S&P 500

  • Upside: potential for greater payouts combined with guaranteed minimum payout
  • Downside: often criticized for their fees; relatively complex; you must pick form a menu of mutual funds (so ideally, it would be like your 401(k) investments in that you want an efficient portfolio)
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