Saving for retirement means putting as much money away as possible and placing it in different, diverse investments in order to protect it best. When it comes to many of these investments, including employer-sponsored 401(k) plans, individual retirement accounts (IRAs) and so forth, many plans have contribution limits that make them a bit restrictive.

Not to say that they aren’t a great way to put money away, because they are, but if you’re looking for a less restrictive investment option, annuities are definitely a great choice.

Two of the most common contract types of annuities are fixed annuities and variable annuities and, if you want to invest in them, understanding each and the difference between the two is vital if you want to create a good savings strategy.

First is a fixed annuity, which is, like the name suggests, based on a fixed or specific amount of return. What happens with a fixed annuity is that, when you sign a contract to purchase them, the company insuring them is guaranteeing that your gains won’t drop below a certain percentage of the investment you made.

During the first year of a fixed annuity contract, the original interest rate remains the same.  Once that first year has ended however, the insuring company that sold them to you can change the interest rate, but it can’t go below that original, predetermined level.

Fixed annuities also guarantee a payment every month once you start collecting on them and, because the terms of that payment are set in stone when the annuities are first purchased, your capital is protected. This makes fixed annuities a very appealing investment option. Keep in mind however that, if the institution that sold you these annuities happens to fail, you will lose your money because they’re not insured by the FDIC. Luckily this doesn’t happen very often.

Variable annuities, in some ways, might appear to be a bit riskier than fixed annuities. They’re very similar to mutual funds in that the capital in a variable annuity is taken and invested in various bonds and stocks, usually in line with your level of risk. The amount of return that you get from a variable annuity is going to be based on the performance of the investments that are made.

What that means is that you assume the risk of the investments being made but, on the upside, there’s a much greater potential for income then with a fixed annuity.

Variable annuities also come with extra benefits, including a guaranteed  death benefit to the beneficiary of your account if you pass away before payout begins.

If you have questions about annuities, or about personal finance in general, please let us know by leaving a comment or sending us an email. We’ll make sure to get back to you ASAP with answers and advice.

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