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

Same Family, Very Different Products

A common reaction when people first hear about annuities: "I've heard annuities are bad investments. Why would anyone buy one?" Often, the product behind that bad story is a variable annuity — and that single experience ends up coloring how a person views every other type of annuity.

It's a little like writing off all cars after owning one unreliable model. Fixed and variable annuities share a name and a tax treatment, and the resemblance pretty much ends there. One is a guaranteed savings vehicle, structurally similar to a CD. The other is an investment platform inside an insurance wrapper, with enough moving parts to require a long prospectus most people never finish reading.

Here's how the two actually differ, so it's easier to figure out which one — if either — fits.

The Core Difference: Guaranteed vs. Market-Driven

A fixed annuity functions a lot like a high-powered CD. An insurance company holds your money and guarantees a specific interest rate for a specific period. Principal is protected. The rate is locked in. The ending balance is known in advance.

A variable annuity functions more like a 401(k) housed inside an insurance contract. Money gets allocated across sub-accounts — essentially mutual funds invested in stocks, bonds, and other securities. Returns depend on how those investments perform. A good year might produce 12% growth. A bad year might produce a 15% loss.

Same product category. Very different actual experience.

Side-by-Side Comparison

The Risk Difference

This is the biggest single distinction between the two products.

With a fixed annuity, the practical risk of losing money is close to zero. The insurance company guarantees both principal and the interest rate. The only realistic scenario for a loss would be carrier insolvency — and even then, state guaranty associations provide a safety net (typically $250,000 per carrier per state).

With a variable annuity, sub-account holdings are fully exposed to market risk. If the S&P 500 falls 30%, the equity sub-accounts inside the variable annuity fall along with it. The statement will show a loss. That's real money out of the account.

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. The catch: those riders cost money (typically 0.75–1.5% per year), and they protect the income stream, not necessarily the account value. The distinction matters quite a bit.

The Fee Gap Is Substantial

This is the part where variable annuities tend to have a harder time defending themselves. Adding up the typical costs:

Fixed annuity fees:

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

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

In dollars: on a $200,000 variable annuity with 3% in total annual fees, that's $6,000 per year regardless of market direction. Over 10 years, the cumulative cost lands well north of $60,000 (more, actually, because fees compound against the balance).

That's real money that could have stayed inside the account. To justify those fees, a variable annuity needs to outperform a comparable fixed annuity by the full fee differential — every single year.

Returns: A Realistic Look

Fixed annuity rates in 2026 are running roughly 4.5–6.0% depending on the term and carrier. That's the guaranteed return, regardless of what markets do.

Variable annuity returns over the past 20 years have averaged roughly 5–8% annually before fees. After 2–4% in fees, net returns frequently land in the 3–5% range. That's an average — some years were considerably better, some considerably worse.

It raises a fair question: why take on market risk through a variable annuity if the net return after fees may end up similar to — or lower than — a guaranteed fixed annuity rate?

The honest answer is that variable annuities looked more compelling when fixed rates were stuck at 1–2%. In the current rate environment, the math has shifted meaningfully in favor of fixed products for a lot of buyers.

Who Should Choose a Fixed Annuity?

Fixed annuities tend to fit well 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 minimize fees eating into returns
• Need a safe money component within an overall retirement strategy
• Are looking for a CD alternative with stronger rates and tax deferral

Who Should Choose a Variable Annuity?

Variable annuities can 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 those costs
• Want the ability to invest in equities within a tax-deferred wrapper

Can You Use Both?

Yes — and it's a common approach, though for different purposes. A fixed annuity covers the "safe money" portion of a retirement plan, providing a guaranteed foundation. A low-cost variable annuity (or more commonly, a fixed index annuity) can handle the portion where some growth potential is desired.

The key is matching each dollar to the right bucket. Money that can't be lost belongs in fixed. Money intended to grow aggressively over a 10+ year horizon might belong in variable — but only if the fees are reasonable.

The Bottom Line

Fixed and variable annuities serve different purposes. One is a savings vehicle with guarantees; the other is an investment vehicle with potential. Neither is inherently "good" or "bad" — but for any specific situation, one is usually a better fit than the other.

In today's interest rate environment, fixed annuities are coming out ahead in most comparisons. When a guaranteed 5%+ is available with no fees and no risk, the case for a high-fee variable annuity becomes harder to make for the majority of buyers.

Every situation is different, and the right answer depends on time horizon, risk tolerance, and what role the product is being asked to play.