Understanding Fixed Income & Variable Income Annuities

A lifetime income annuity, also called a payout or immediate annuity, is an income annuity that pays you out a dollar amount each month for as long as you live. The lifetime income annuity comes in two flavors – fixed and variable.

With fixed income annuity, you get a set income each month that does not increase or decrease with time. So on your first month if you get $500, then you’ll get $500 in the thirteenth and fortieth months. The benefit is that you get the certainty of income, a set dollar amount, that will not fluctuate at all. The disadvantage is that it isn’t inflation adjusted – $500 in five years may not be worth as much as it is now. It is very important that you shop around for a fixed annuity because how much you earn can vary depending on who you go with.

With a variable income annuity, you invest your money in subaccount portfolios that resemble mutual funds. How much you are paid out each month depends on the performance of these subaccounts, so you lose the predictability but may get protection, potentially, from inflation. There is always the risk that your annuity may lose value and that you’ll get a smaller check. Again, it’s critically important for you to look around for who you pick your variable income annuity with because fees can eat into your earnings very quickly if you aren’t careful.

Fixed and variable annuities work differently from mortgages. A variable rate mortgage is just a loan so you don’t have any investment performance risk. A fixed rate mortgage gives you certainty about payments.






2 responses to “Understanding Fixed Income & Variable Income Annuities”

  1. […] Here are the factors she lists: 1. Guaranteed Income – The idea of guaranteed income is tricky in and of itself, though she doesn’t go into it, because there isn’t much in life that’s guaranteed. I’ve discussed the dangers of fixed annuities in the past (they can get destroyed by inflation) and those issues affect all other “guaranteed” type securities. 2. Lifespan – Considering how long or how short you are likely to live, you might want to adjust when you start taking social security payments. […]

  2. […] the guarantee-ness of your company’s pension and Social Security). I’ve written about fixed income and variable rate annuities in the past and this post looks to expand on the basics introduced by that […]