Slow but steady or fast but volatile?© EcoView/stock.adobe.com, © byrdyak/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc.Fixed and variable annuities are insurance products that can each provide a steady stream of income for life, although they achieve that aim differently.

　　Fixed annuities appeal to savers who are seeking predictable income based on a fixed interest rate. This is ideal for retirees focused on preserving their savings. Variable annuities offer the potential to grow savings through investments tied to the financial markets, with gains (and losses) that vary based on the performance of those investments.

　　The choice between a fixed or variable annuity largely depends on how comfortable you are with risk. But there are other considerations. Although annuities add a degree of certainty to retirement income, they aren’t right for everyone. These products are complex and typically have high fees that may not be immediately apparent.

　　Fixed annuity overviewFixed annuities provide predictable payments in retirement based on a guaranteed interest rate (set at the time of purchase) and your total contributions. Many fixed annuities allow you to add funds periodically—typically monthly or yearly—to increase the value of your annuity before you start receiving payments. Because the performance isn’t tied to investments, your payout during retirement stays the same, regardless of what’s happening in the financial markets.

　　Variable annuity overviewUnlike a fixed annuity, which provides predictable payments, a variable annuity’s income fluctuates with market performance. Payments can increase or decrease depending on how well your chosen investments perform.

　　Key features of a variable annuity include a guaranteed death benefit, various payout options, tax-free transfers between investments, and optional living benefits.

　　Many variable annuities come with floors that limit your losses. For example, if the floor on your variable annuity is -5%, and your investments lose 12%, you’d still see only 5% in losses. The insurance company absorbs the rest. When a variable annuity has a floor, it typically also has a ceiling, or cap, which limits what you can earn from your investments. If your cap is 8%, but your investments return 12%, the insurance company would keep that extra 4% in returns, just as it absorbs any losses beyond your floor.

　　Once you annuitize your variable annuity (that is, convert your balance into a series of payments), how much you receive is determined by your total balance. That depends on the performance of your investments.

　　Some variable annuities offer options, known as riders, that allow for steady payments, rather than those that fluctuate with the market—which sounds a lot like a fixed annuity. But the variable annuity’s underlying account balance still changes with market performance, possibly affecting how long your payments will last.

　　Comparing variable vs. fixed annuitiesBoth variable and fixed annuities offer benefits such as tax-deferred earnings. As with other tax-advantaged retirement accounts, you could potentially be penalized if you try to start taking payments before age 59½. After payouts begin, your income is usually subject to tax.

　　Both fixed and variable annuities are available as deferred or immediate, depending on when you’d like to start receiving payments:

　　Deferred. You contribute over time, allowing the annuity to grow during the accumulation phase. With a deferred fixed annuity, the balance is based on a guaranteed interest rate and how much you put in. In a deferred variable annuity, the performance of your investments affects your balance, increasing or decreasing it.Immediate. You make one lump sum contribution and begin receiving payments immediately. With an immediate fixed annuity, each payment is the same. Payments from an immediate variable annuity typically fluctuate based on the performance of your investments.Key differences between variable and fixed annuities

　　Higher growth potential tied to market performanceFlexibility to tailor income to personal needsInvestment gains are tax deferredCons of variable annuities

　　Risk of losses if underlying investments lose valueWithdrawals may incur fees, taxes, and penaltiesFees are often higher than fixed annuitiesPros of fixed annuities

　　Guaranteed rate of growthPredictable, set payoutsPrincipal is protectedCons of fixed annuities

　　Returns may not keep pace with inflationEarly withdrawals may result in fees, taxes, and penaltiesLimited control over investmentsAnnuity surrender and early withdrawal feesWhether you choose a variable or fixed annuity, understand the difference between surrender charges and early withdrawal penalties to avoid unexpected fees.

　　Surrender charge: A fee the insurer charges for withdrawing money or canceling your annuity within the contract’s surrender period, often the first several years.Early withdrawal penalty: Separate from a surrender charge, this is a 10% federal tax penalty levied by the Internal Revenue Service (IRS) for withdrawing funds before age 59½. The penalty applies to many retirement accounts, including annuities.Before surrendering an annuity, review the potential costs and consequences to ensure you don’t lose money needlessly.

　　Survivor and death benefitsFixed and variable annuities both offer options for survivor and death benefits. These features provide regular income or lump-sum payments to heirs and other beneficiaries after the annuity holder dies, helping to provide financial support at a critical time.

　　The bottom lineAnnuities can complement Social Security and retirement savings by providing lifelong income. Fixed annuities offer more certainty with guaranteed monthly payment, while variable annuities offer the potential to grow your savings, but with increased risk and fees. Choosing the right type depends on your financial goals and tolerance for market volatility. If you’re considering an annuity, explore which option best suits your retirement strategy and expectations. If you’re unsure, a financial advisor can help you review your options and answer any questions.

　　Updated Investor Bulletin: Variable Annuities | investor.gov[PDF] Variable Annuities: What You Should Know | sec.gov