Fixed vs Variable Annuity
One promises a rate, the other promises a market ride with guardrails. The fee gap between them decides most comparisons before returns even enter the picture.
Fixed annuities guarantee principal and a stated rate with minimal explicit fees. Variable annuities invest in markets with 2 to 4 percent yearly all-in fees, plus optional riders. For guaranteed income, fixed usually wins; variable rarely beats plain investing plus a fixed annuity.
Fixed annuities
The insurer guarantees your principal and credits a stated interest rate, currently competitive with CDs. No annual fee line items; the insurer earns the spread. Surrender charges apply if you withdraw early, typically fading over 5 to 10 years.
Multi-year guaranteed annuities (MYGAs) lock a rate for 3 to 10 years and are the simplest comparison to bank CDs. For a guaranteed-income floor, fixed immediate or deferred income annuities built on this chassis are the clean choice.
Variable annuities
Your premiums go into subaccounts resembling mutual funds. Gains and losses are yours, minus layers of fees: mortality and expense charges around 1.25 percent, fund expenses near 1 percent, and rider fees for guaranteed income or death benefits adding 1 percent or more.
That 2 to 4 percent yearly drag compounds brutally. A market returning 8 percent nets you 4 to 6 percent, turning the tax deferral benefit into an expensive wrapper. Academic research consistently finds most buyers would do better holding the same funds in a taxable account.
The verdict for income buyers
If the goal is guaranteed retirement income, buy the guarantee directly: a fixed immediate or deferred income annuity. It costs less, does exactly what you want, and leaves no fee mystery.
If the goal is growth with some downside protection, compare a variable annuity's all-in cost against simply investing and keeping a cash buffer. The annuity rarely wins that comparison once fees are fully counted.
Skip the arithmetic
Model fixed payout scenarios with the free annuity calculator.
Fixed vs variable questions
Why are variable annuity fees so high?
Mortality and expense risk charges (about 1.25 percent) pay for the insurance wrapper. The subaccounts charge fund expenses like mutual funds. Riders for guaranteed lifetime income or enhanced death benefits add 0.5 to 1.5 percent each. Ask for the all-in number in writing before signing.
Can I get out of a variable annuity?
Most contracts allow 10 percent yearly penalty-free withdrawals. Beyond that, surrender charges bite hardest early and fade yearly. Exchanging into a better contract via a 1035 exchange avoids taxes but restarts the surrender clock, so do it rarely and deliberately.