Fixed vs Variable Annuities: Which One Belongs in Your Retirement Plan?

Two Annuities, Two Completely Different Animals

Here's a conversation we have almost every day: "I've heard annuities are bad investments. Why would anyone buy one?" And about half the time, the person asking is thinking about variable annuities — but painting all annuities with the same brush.

That's like saying "cars are unreliable" because you once owned a lemon. Fixed and variable annuities share a name and a tax treatment, but that's about where the similarities end. One is a guaranteed savings vehicle. The other is an investment platform wrapped in an insurance contract.

Let's break down exactly how they differ so you can figure out which one — if either — makes sense for you.

The Core Difference: Guaranteed vs. Market-Driven

A fixed annuity works like a high-powered CD. You give an insurance company your money, they guarantee you a specific interest rate for a specific period. Your principal is protected. Your rate is locked in. You know exactly what your account will be worth at the end of the term.

A variable annuity works more like a 401(k) inside an insurance wrapper. You allocate your money across sub-accounts — essentially mutual funds that invest in stocks, bonds, and other securities. Your returns depend on how those investments perform. In a good year, you might earn 12%. In a bad year, you might lose 15%.

Same product category. Completely different experience.

Side-by-Side Comparison

Let's Talk About Risk

This is the biggest differentiator, so we want to be crystal clear.

With a fixed annuity, your risk of losing money is essentially zero. The insurance company guarantees your principal and your interest rate. The only scenario where you'd lose money is if the insurance company itself became insolvent — and even then, state guaranty associations provide a safety net (typically $250,000 per carrier per state).

With a variable annuity, you're exposed to full market risk on the sub-account portion of your investment. If the S&P 500 drops 30%, the equity sub-accounts in your variable annuity drop right along with it. Your statement will show a loss. That's real money gone from your account.

Now, many variable annuities offer optional guaranteed minimum income benefit (GMIB) or guaranteed lifetime withdrawal benefit (GLWB) riders that protect a "benefit base" regardless of market performance. But here's the catch — those riders cost money (typically 0.75–1.5% per year), and they protect your income stream, not necessarily your account value. There's an important difference.

The Fee Gap Is Enormous

This is where the comparison gets uncomfortable for variable annuities. Let's add up the typical costs:

Fixed annuity fees:

• Explicit annual fees: $0
• The insurance company earns money on the spread between what they earn on your money and what they credit to you. That's it. Clean, simple, invisible to you.

Variable annuity fees (typical):

• Mortality & expense (M&E) charge: 1.0–1.5%
• Administrative fees: 0.10–0.30%
• Sub-account management fees: 0.5–1.5%
• Optional rider fees (income, death benefit): 0.75–1.5%
• Total: 2.35–4.80% per year

Let's put that in dollar terms. On a $200,000 variable annuity with 3% in total annual fees, you're paying $6,000 per year — whether the market goes up, down, or sideways. Over 10 years, that's $60,000+ just in fees (more, actually, because fees compound against your balance).

That's real money that could have been growing in your account. For a variable annuity to justify its fees, it needs to outperform a comparable fixed annuity by the full fee differential — every single year.

Returns: The Honest Picture

Let's talk numbers. Fixed annuity rates in 2026 are running around 4.5–6.0% depending on the term and carrier. That's your guaranteed return. You'll get that whether the market soars or crashes.

Variable annuity returns over the past 20 years have averaged roughly 5–8% annually before fees. After fees of 2–4%, your net return drops to 3–5% in many cases. And that's an average — some years were much better, some were much worse.

Here's the uncomfortable question: why take on market risk with a variable annuity if your net return after fees might end up similar to — or even lower than — a guaranteed fixed annuity rate?

The honest answer is that variable annuities made more sense when fixed rates were at 1–2%. In today's rate environment, the math has shifted significantly in favor of fixed products for many people.

Who Should Choose a Fixed Annuity?

Fixed annuities make sense if you:

• Want guaranteed, predictable growth — no surprises, no volatility
• Are within 5–15 years of retirement and can't afford to lose money
• Value simplicity — one rate, one contract, easy to understand
• Want to avoid fees eating into your returns
• Need a safe money bucket in your overall retirement strategy
• Are looking for a CD alternative with better rates and tax deferral

Who Should Choose a Variable Annuity?

Variable annuities might make sense if you:

• Have maxed out all other tax-advantaged accounts (401k, IRA, Roth) and want additional tax-deferred growth
• Have a long time horizon (10+ years) and can weather market volatility
• Specifically want a guaranteed income rider for retirement and are willing to pay for it
• Are comfortable with the fee structure and believe market returns will exceed the costs
• Want the ability to invest in equities with a tax-deferred wrapper

Can You Have Both?

Absolutely. Many of our clients use both types — but for different purposes. A fixed annuity handles the "safe money" portion of their retirement strategy, providing a guaranteed foundation. A low-cost variable annuity (or more commonly, a fixed index annuity) handles the portion where they want some growth potential.

The key is knowing which bucket each dollar belongs in. Money you can't afford to lose? Fixed. Money you want to grow aggressively with a 10+ year horizon? Variable — but only if the fees are reasonable.

The Bottom Line

Fixed and variable annuities serve fundamentally different purposes. One is a savings vehicle with guarantees. The other is an investment vehicle with potential. Neither is inherently "good" or "bad" — but one is almost certainly a better fit for your specific situation.

In today's interest rate environment, we'll be honest: fixed annuities are winning this comparison for the majority of our clients. When you can get a guaranteed 5%+ with no fees and no risk, the math for a high-fee variable annuity becomes very hard to justify.

But your situation is unique. If you're comparing these two options, we'd love to run the numbers with you and show you exactly how each one would play out over your specific time horizon.