Fixed vs. Variable vs. Indexed Annuities: What's the Difference?

Joseph Cioffi | Sep 29 2025 20:00

Understanding Annuities: A Basic Overview

Annuities are financial products that can provide a steady income stream during retirement. They are typically offered by insurance companies and come in various forms. Understanding the differences between fixed, variable, and indexed annuities is crucial for selecting the right product to match your financial goals and risk tolerance.

Fixed Annuities

A fixed annuity offers a guaranteed interest rate for a specified period, which provides stability and predictability. This can be attractive for those who want a secure investment and a guaranteed income stream during retirement. The insurance company takes on the investment risk, making it a low-risk option for conservative investors. However, the returns might not keep pace with inflation compared to more aggressive investment options.

Variable Annuities

Variable annuities offer the potential for higher returns by allowing you to invest in various sub-accounts, similar to mutual funds. The performance of your annuity depends on the market performance of these investments. While this can lead to greater growth potential, it also introduces more risk, as your income can fluctuate based on market conditions. It's essential for investors choosing variable annuities to have a higher risk tolerance and a longer investment horizon to ride out market volatility.

Indexed Annuities

Indexed annuities blend features from both fixed and variable annuities. The returns are typically linked to a market index like the S&P 500, offering the possibility of higher returns than a fixed annuity without direct market investment. These products often include a cap on potential returns and a guaranteed minimum interest rate, providing a balance of safety and growth potential. Indexed annuities can appeal to those who want some exposure to market gains while maintaining a degree of principal protection.

Which Annuity is Right for You?

Choosing an annuity depends on your financial situation, risk appetite, and retirement goals. Fixed annuities might suit risk-averse individuals seeking stability, while variable annuities could appeal to those looking for growth despite the risk. Indexed annuities offer a middle ground, balancing growth potential and security. It's advisable to consult with a financial advisor to evaluate your options based on your unique circumstances and ensure your retirement strategy aligns with your financial objectives.