If you’re living in Puerto Rico and planning for retirement, you’re likely thinking about how to create a stable income without taking on unnecessary risk. With the rising cost of living and the uncertainty of social security or pension coverage, it’s more important than ever for Puerto Ricans to explore secure, long-term financial tools. One such tool is the annuity—a product designed to provide consistent income during retirement.
But not all annuities work the same way. Fixed and variable annuities come with different benefits and risks, and choosing the right one can have a significant impact on your financial future. In this guide, we break down the differences between fixed and variable annuities, explain how they work, and help you figure out which one fits your personal goals. If you’re trying to optimize for retirement income, long-term security, or market growth, this blog will help you make a more confident, informed decision.
What Is an Annuity and How Does It Work?
An annuity is a financial product offered by insurance companies that provides a stream of income in retirement, usually in exchange for a lump-sum payment or a series of payments. It’s designed to convert your savings into consistent payouts, either for a specific period or for life.
There are two main phases in an annuity:
- Accumulation Phase: The period where your money grows tax-deferred.
- Distribution Phase: The period when you start receiving income payments.
Annuities are often used as a complement to 401(k)s or IRAs to create guaranteed income and protect against outliving your savings.
What Is a Fixed Annuity?
A fixed annuity offers a guaranteed interest rate for a specified time. It’s a conservative product ideal for people who value stability over growth. Unlike stocks or mutual funds, fixed annuities are not affected by market volatility.
Types of Fixed Annuities:
- Traditional Fixed Annuities: Offer a guaranteed rate for the term of the contract.
- Multi-Year Guaranteed Annuities (MYGAs): Offer a guaranteed interest rate that remains the same over a set number of years.
- Fixed Indexed Annuities: Tie returns to an index like the S&P 500, but with a guaranteed minimum.
This type of annuity is ideal for risk-averse investors who want predictable income and protection of principal. Since they are insurance products, they’re regulated by state insurance departments (not FDIC-insured), and offer additional safety nets.
What Is a Variable Annuity?
A variable annuity offers the potential for higher returns by investing your contributions into a selection of subaccounts (similar to mutual funds). The returns—and your eventual income—depend on market performance.
While the upside is growth potential, the downside is exposure to market losses. However, most variable annuities allow for the addition of riders like:
- Guaranteed Minimum Income Benefit (GMIB)
- Death Benefit Riders
- Long-Term Care Riders
These riders offer a safety net but come at an added cost. Variable annuities are ideal for people who have a longer investment timeline, a higher risk tolerance, and are comfortable navigating market fluctuations.
What are the Differences Between Fixed & Variable Annuities?
Here’s a high-level breakdown of the main differences:
| Feature | Fixed Annuity | Variable Annuity |
|---|---|---|
| Risk Level | Low | Medium to High |
| Returns | Guaranteed | Market-based |
| Fees | Low to none | High (2%–3.5%) |
| Investment Control | None | Yes (subaccounts) |
| Payout Predictability | High | Variable |
| Tax Treatment | Tax-deferred | Tax-deferred |
| Suitable For | Conservative Investors | Growth-Oriented Investors |
How Do Fees Compare Between Fixed & Variable Annuities?
Understanding annuity fees is essential because high fees can eat into your returns. Fixed annuities typically have little to no fees, making them more straightforward.
Variable annuities, on the other hand, are more complex and include several layers of costs:
- Mortality and Expense (M&E) Risk Charges (typically 1%–1.5%)
- Administrative Fees
- Fund Management Fees for the subaccounts
- Rider Fees for optional guarantees (up to 1%–2%)
According to FINRA, the average total annual fees for a variable annuity can range between 2% and 3.5% of your account value.
Due to these costs, it’s wise to consult the best annuity consultants in Puerto Rico when considering a variable annuity, especially if you’re unfamiliar with fee structures or tax implications.
Which Annuity Offers Better Growth Potential?
Variable annuities have a higher growth ceiling because they invest in market-linked funds. If the market does well, your investment has the potential to grow substantially.
Fixed annuities provide stability but have limited growth potential. They’re ideal for preserving capital and generating modest returns over time.
If your main concern is beating inflation, a variable annuity might offer better long-term results—but only if you’re willing to accept the risk.
What Are the Risks Involved with Annuities?
Every investment has risk, and annuities are no different:
Risks with Fixed Annuities:
- Interest Rate Risk: Future rates could rise, making your locked-in rate less competitive.
- Inflation Risk: Returns may not keep pace with inflation.
Risks with Variable Annuities:
- Market Risk: Investment value can decline.
- High Fees: Reduces overall returns.
- Complexity: Riders and investment options can be confusing.
Understanding these risks helps determine whether an annuity fits your comfort level and investment horizon.
How Are Fixed and Variable Annuities Taxed?
Both annuity types benefit from tax-deferred growth, meaning you won’t pay taxes on earnings until you begin withdrawals.
However, withdrawals are taxed as ordinary income, not capital gains. This means you could be in a higher tax bracket during retirement if you don’t plan properly.
If you withdraw before age 59½, you may face a 10% IRS penalty in addition to income tax. It’s important to time your withdrawals strategically and possibly use annuities as part of a broader tax diversification strategy.
Who Should Consider a Fixed Annuity?
Fixed annuities are best suited for:
- Retirees or near-retirees seeking consistent income.
- Risk-averse investors who value principal protection.
- Individuals looking to supplement their pensions or Social Security.
They’re often used to cover essential expenses and form the “safe” layer in a retirement income plan.
Who Should Consider a Variable Annuity?
Variable annuities are ideal for:
- Long-term investors with a higher risk tolerance.
- People who’ve maxed out their 401(k) or IRA contributions.
- Those looking for tax-deferred growth with optional income guarantees.
These products can add flexibility and upside potential to a diversified retirement plan.
Are Indexed Annuities a Middle Ground Between Fixed and Variable?
Yes. Fixed Indexed Annuities (FIAs) combine features of both types:
- Returns are linked to the performance of a specific market index, such as the S&P 500.
- Downside protection through guaranteed minimum returns.
- Return caps or participation rates limit the upside.
Indexed annuities are great for investors who want some exposure to growth without risking principal. They’re increasingly popular among people looking for moderate growth and safety.
For those in the Caribbean, there’s a growing market for Puerto Rico-indexed annuities offering local support and compliance advantages.
How to Decide Which Annuity Is Right for You?
Before committing to an annuity, consider:
- Your age and time to retirement
- Risk tolerance
- Financial goals (growth vs. security)
- Current tax bracket and future expectations
- Other sources of retirement income
Annuities should be part of a diversified retirement strategy, not your entire plan. Getting professional advice can help align the product with your long-term needs.
What Questions Should You Ask Before Buying an Annuity?
- What are the total fees and charges?
- What is the surrender period and penalty?
- Can I add income or long-term care riders?
- How is the annuity taxed?
- What are my investment options (for variable annuities)?
Asking these questions will ensure that you understand your purchase and make a well-informed financial decision.
Should You Buy an Annuity Through a Financial Advisor or Directly?
Both options have pros and cons:
Financial Advisor:
- Personalized guidance and tailored strategies.
- It can help you compare products across multiple providers.
- May charge a fee or earn commission.
Direct Purchase:
- Potentially lower cost.
- Limited access to product comparisons.
If you’re unsure, always choose an advisor with fiduciary responsibility, who puts your interests first.
Final Thoughts
Choosing between a fixed and variable annuity boils down to your personal financial goals, risk tolerance, and time horizon. Fixed annuities offer peace of mind and guaranteed returns, while variable annuities provide growth potential with greater risk.
If you’re navigating the complex annuity market, working with PSR Assurance, the best financial advisors in Puerto Rico can make all the difference. At PSR Assurance, we help individuals align annuity strategies with broader retirement and financial planning goals, offering clarity, security, and confidence in their choices.
Want to find out which annuity is right for you? Reach out today for a no-obligation consultation and get started on securing your future with confidence. Book a free consultation with PSR Assurance and get expert advice today!
