A variable annuity is a type of retirement contract issued by an insurance company that allows investors to allocate money into market-based investment options within the annuity. These investments often function similarly to mutual funds and may include stock funds, bond funds, or balanced portfolios. The value of a variable annuity fluctuates based on market performance, meaning the account value can rise or fall depending on how the underlying investments perform.

Variable annuities are often marketed as retirement planning tools because they offer tax-deferred growth and optional lifetime income features. However, these contracts are also known for having complex fee structures and exposing investors to market volatility. Because the account value is tied to investment performance, it is possible for a variable annuity to lose value during market downturns.

For this reason, many retirees and pre-retirees compare variable annuities with other annuity designs that offer stronger principal protection. In particular, many individuals explore fixed and indexed annuity strategies when researching retirement income planning.

Request an Annuity Quote

How Variable Annuities Work

When someone purchases a variable annuity, their premium is placed into investment subaccounts that operate similarly to mutual funds. These subaccounts typically invest in stocks, bonds, or other securities. The account value grows or declines based on the performance of those investments.

Because the investment value fluctuates with market conditions, variable annuities can produce strong returns during favorable markets but may also experience losses during market downturns. This exposure to market volatility is one of the defining characteristics of variable annuities.

Variable annuities may also include optional riders that provide income guarantees. These riders often attempt to protect retirement income even if the investment value declines. However, these features typically add additional costs to the contract.

Fees Associated with Variable Annuities

One of the most commonly cited concerns with variable annuities is their fee structure. Variable annuities often include multiple layers of fees that can reduce long-term returns.

These costs may include mortality and expense charges, investment management fees, administrative fees, and rider costs for optional benefits such as guaranteed lifetime income.

Over time, these fees can significantly impact investment performance. Because of these costs, some investors compare variable annuities with other annuity types that may offer lower fees and simpler contract structures.

For example, some retirement planners explore products such as bonus annuities or other annuity structures that offer predictable growth without multiple layers of investment management fees.

Market Risk and Volatility

Unlike fixed annuities, variable annuities expose investors to market risk. If the stock market declines, the value of the underlying subaccounts can decrease. While optional riders may provide certain guarantees, these riders typically add costs and complexity to the contract.

This risk exposure can be challenging for retirees who rely on their savings to generate income during retirement. Large market losses early in retirement can reduce the sustainability of a retirement portfolio.

Some investors prefer annuity structures that avoid market losses altogether. For example, fixed indexed annuities credit interest based on the performance of market indexes but protect principal from direct market declines.

These types of annuities may also include income riders designed to generate predictable retirement income streams. Many retirees research options such as fixed indexed annuities with income riders when comparing retirement income strategies.

Why Some Investors Choose Fixed Indexed Annuities Instead

Although variable annuities allow direct market participation, many retirees prefer annuity designs that provide stronger principal protection. Fixed indexed annuities have become increasingly popular because they combine several features that address common concerns associated with variable annuities.

One major advantage is principal protection. Fixed indexed annuities typically protect the initial premium from market losses. If the underlying index performs poorly, the contract may simply credit zero interest for that period rather than experiencing a loss.

Another advantage is cost structure. Many fixed indexed annuities have fewer investment-related fees compared to variable annuities because they do not rely on actively managed investment subaccounts.

In addition, many fixed indexed annuities offer income riders that can generate lifetime income streams during retirement. These income riders can provide predictable income without exposing the underlying account value to market volatility.

Some investors also review specific annuity products when comparing strategies. For example, individuals evaluating annuity designs sometimes explore products such as Equitrust MarketForce Bonus annuities when analyzing growth potential and income features.

How Variable Annuities Fit into Retirement Planning

Variable annuities may appeal to investors who are comfortable with market volatility and who want the potential for higher investment returns within a tax-deferred insurance structure. These products can be useful for individuals who have long investment time horizons and a high tolerance for risk.

However, many retirees approaching retirement prioritize income stability and principal protection rather than market exposure. For these individuals, fixed or indexed annuity structures may provide a more predictable retirement income strategy.

Understanding how annuities interact with other retirement assets is also important. Some retirees evaluate how inherited retirement accounts function alongside annuity income strategies. For example, learning about inherited IRA rules can help families coordinate income planning and wealth transfer.

Request an Annuity Quote