Variable Annuitization
Candlefocus EditorA variable annuity stands apart from a fixed annuity in that the payments the policyholder receives aren't set by a predetermined rate but instead are determined by the performance of the annuity's investments. With a variable annuity, payments may fluctuate from month-to-month and may rise and fall depending on the annuity's investment performance. This variable approach makes it possible for a policyholder to take advantage of potential higher payouts because of better-performing investments, but similarly puts them at a greater risk of receiving lower payments if the annuity investments perform poorly.
When deciding whether to annuitize with a variable annuity, investors should assess their ability to manage the higher level risk involved with varying returns and payments. Those with longer investment horizons, who can benefit from long term capital market appreciation, and who have a greater tolerance for volatility may find this approach more attractive than those who may only have a short time before they would like to see the payout begin.
On the other hand, variable annuitization may be less attractive for those investors who plan to receive payments from the annuity over a longer period of time. In this case it may be preferable to opt for a fixed annuity, where the payouts are guaranteed regardless of market conditions. These investors forgo the potential to receive higher payouts with variable annuitization, as returns are locked in.
Ultimately, depending on their attitude towards risk, investors have the choice to select either variable or fixed annuitization based on what best suits their needs and objectives. Investors should take into consideration the current and future market conditions and an individual’s risk tolerance before making a decision on which approach to take.