Fixed vs. Variable Annuities: How to Choose for Inflation Protection
- fabilc109
- May 27
- 3 min read
When it comes to planning for retirement, understanding the options for steady income sources is important. Annuities have become a common choice for many looking to secure regular payments in their later years. But not all annuities are the same — fixed and variable annuities work differently, and knowing the difference can help you make a more informed decision.
At the same time, inflation is a factor many people overlook. How do you protect your savings from rising costs? Some annuities include features designed to help with inflation — things like inflation-protected annuities or annuities with inflation riders. Let’s explore how these options work, and how they might fit with your retirement goals.
What Is a Fixed Annuity?
A fixed annuity offers predictable payments. You pay a lump sum upfront (or in installments), and the insurer guarantees a fixed return — which means you receive steady, known income during retirement. This certainty can be comforting for those who want stability and want to avoid market ups and downs.
Fixed annuities tend to have lower risk but usually offer lower returns compared to variable annuities. They’re often preferred by those who want a simple, no-surprises approach.
What Is a Variable Annuity?
Variable annuities work differently. Payments vary based on the performance of underlying accounts or assets. While you get the potential for higher returns, there’s also more risk involved — your payments can go up or down depending on how those investments perform.
People who want to be a bit more aggressive about growing their retirement income might consider variable annuities. However, they also need to be comfortable with some fluctuations in income.
Inflation and Why It Matters for Retirement Income
Inflation means the cost of goods and services goes up over time. Even a modest rate of inflation — around 2-3% per year — can reduce your purchasing power significantly over a couple of decades.
If your retirement income doesn’t keep up with inflation, you might find your money doesn’t stretch as far as you expected.
This is where inflation-adjusted annuities or annuities for inflation protection come into play.
How Do Annuities Help Protect Against Inflation?
Some annuities come with inflation riders, which means your payments increase annually by a set percentage or based on inflation indexes. These can help you keep pace with rising costs, although they might start with a lower initial payment compared to annuities without inflation protection.
There are also inflation-protected annuities designed specifically to adjust your income as prices rise, giving you more security in the long run.
What to Consider When Choosing Between Fixed and Variable Annuities
Your Risk Tolerance: Fixed annuities provide stability, while variable annuities have more ups and downs. Consider how much fluctuation you’re comfortable with in your income.
Inflation Protection Needs: If keeping up with inflation is a priority, an annuity with an inflation rider might be a better fit.
Length of Retirement: Longer retirements mean inflation can have a bigger impact. Some annuities may provide more value in this scenario.
How Much Retirement Income Do You Need?: This depends on your lifestyle, expenses, and other sources of income like Social Security or pensions.
Curious About Planning for Retirement?
Many people wonder how much retirement do I need? or how much retirement should I have at 40 or 50? These are good questions. Your needs can vary widely depending on your goals and situation.
It’s also common to ask how many retirement accounts can you have? The answer is you can have multiple, including 401(k)s, IRAs, and annuities, which can work together to create a diversified income stream.
Some Interesting Facts About Retirement Ages and Income
The typical retirement age in the US hovers around 65, but some retire earlier or later based on personal and financial factors.
Your retirement benefits may be taxable, so planning ahead for taxes can make a difference.
Many aim to have saved at least several times their annual salary by age 40-50, but this varies by individual.
Annuities and Your Location
If you live in Tucson or Tacoma, you have options tailored to your area. Local financial advisors can help explain annuity rates and options that fit your retirement plan, taking state-specific regulations into account.
Planning Your Retirement Income Stream
Annuities can be one part of a larger retirement income plan. Understanding how your income sources work together can help you feel more confident about your financial future.
If you want to dig deeper into your retirement income options, take a look at this blog: Understanding Your Sources of Retirement Income.
If you’d like to discuss how annuities might fit your situation or have questions about retirement income, don’t hesitate to get in touch. We’re here to provide clear, straightforward information without any pressure.
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