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Two Types of Annuities for Retirement Income

Key Points
  • Turning your retirement savings into income that will last can be a major challenge when you're preparing for and then living in retirement.

  • Immediate fixed life annuities and variable annuities guarantee income that can't be outlived in retirement.

  • Adding an optional guaranteed lifetime withdrawal benefit to a variable annuity guarantees a minimum level of income, regardless of market fluctuations.

  • Understanding the unique attributes of each can help you decide if they'll support your income plan.

After all your hard work saving for retirement, you'll need to manage market risk and generate income that lasts. Annuities are one tool that can help—particularly if you're seeking a stream of income that you know will be around as long as you are.

There are two types of annuities we believe may be worth considering to generate income: immediate fixed annuities and variable annuities. Many variable annuities offer an optional rider (often called guaranteed lifetime withdrawal benefits, or GLWBs) that can provide additional protection for your income.

Immediate fixed annuities provide pension-like income, while variable annuities provide a guaranteed stream of lifetime income at retirement, either through "annuitization" or the purchase of an optional GLWB rider.

Under the standard annuitization option, an investor's retirement income is based on the performance of the underlying investment options he/she selected. Adding a GLWB rider locks-in a minimum level of income that can rise with the performance of the investment options but can never fall.

Annuities add protections to your retirement

First off, why consider an annuity? One reason beats all the others, in our view: Unlike a portfolio of stocks and bonds, annuities combine characteristics of standard investments with insurance features. Most life annuities provide a reliable stream of income that you can't outlive, and some can help you reduce or transfer the risk of investing in the market for part of your portfolio to an insurer.

Annuities are also a way to systematically turn savings into income. This may seem complicated, but it's one of the most important steps to consider when managing your retirement portfolio—how, exactly, will you create regular withdrawals from your portfolio that will last?

Immediate fixed annuities provide pension-like income for life

Immediate fixed annuities are the oldest, most common type of annuity: you pay an insurance company a lump sum up front, and in return, you receive a fixed monthly payment for life (or some other specific time period)—a reliable stream of income you can't outlive.

Immediate fixed life annuities may make sense, in our view, if you're seeking income now and don't want to worry about market fluctuations—at least for a portion of your savings. The insurance company manages those details and makes sure you receive a fixed payment that lasts for life. As long as the insurance company is solvent, you'll receive a payment for the same amount every month.

If you live longer than average, you'll benefit from owning an immediate fixed life annuity. The rate of return depends on your initial investment and how long you live. Annuity experts call this a "mortality credit." If you live longer than other investors, you'll benefit. In fact, it may be most useful to think about an immediate fixed annuity not purely as compared to other investments, but more for its insurance features.

What about the current low-interest-rate environment—can that impact payments from an annuity? It may not make the most sense to load up on immediate fixed annuities when interest rates are low, as the payments depend, to a degree, on the market. But if you need guaranteed income, it probably won't pay to wait too long either. One strategy is to stagger your purchase of immediate fixed annuities over time, much like a bond ladder but using annuities, as your guaranteed income needs grow.

It's worth noting that monthly payments from immediate fixed life annuities are generally higher the older you are at the time of purchase. The insurer anticipates that it will be making payments for a shorter period of time, so it can pay a higher proportion of the lump sum on a monthly basis. This feature isn't shared by variable annuities with GLWBs.

Variable annuities with GLWBs: income protection, flexibility and growth potential

In contrast to immediate fixed annuities, variable annuities with an optional GLWB rider don't require that you to turn cash over irrevocably to an insurance company. Rather, the investor retains control of the money and makes withdrawals from a portfolio of investments that is held within the variable annuity.

When purchased with a GLWB feature (at an additional cost), the rider may protect against market downturns by guaranteeing your ability to take withdrawals for life at a certain minimum level, no matter how the market performs, without annuitizing the contract. In other words, you can stay invested in the market and benefit from flexibility and potential for growth.

You should be aware, however, that the GLWB is not a contract value and is not available for withdrawal like a cash value. Your actual contract value will deplete with each withdrawal, though you'll continue to take income for life even if withdrawals and market losses deplete your annuity's value to zero. There's also an annual cost associated with the additional rider.

This type of annuity can be more complex than immediate fixed annuities, so it's important to examine the details and talk with a professional to make sure you understand them thoroughly. But at the most basic level, purchasing a GLWB rider with a variable annuity adds an additional layer of protections to a portfolio of investments held within a variable annuity to generate retirement income. If markets don't perform well, you have protections, and if they perform better than expected, you have some potential for growth (after accounting for fees and withdrawals).

One tradeoff compared to immediate fixed annuities is that variable annuities with GLWBs generally promise a lower guaranteed payment initially once withdrawals begin. A "typical" guaranteed annual withdrawal rate from a variable annuity with GLWB may be 5% of an "income base" generally based on the highest contract anniversary value the contract achieved since purchase of the GLWB rider. An immediate fixed life annuity will generally quote a monthly or annual payment. But the amount of the withdrawal, if calculated as a percentage of the lump sum invested, will generally be higher.

Another consideration is cost. GLWB riders are purchased at an additional cost, generally starting at around 0.8% per year and rising. This is the cost of adding more protections to the flexibility and growth potential. Besides the cost of the rider, variable annuities are subject to a number of charges. These charges will reduce the value of your account and return on your investments.

How to choose an annuity for you

Both types of annuities—immediate fixed and variable with GLWBs—provide guaranteed income in retirement, but neither type will be right for every investor. Do you value a higher guaranteed lifetime income in a simple package, or do you value flexibility and growth potential? Are you still preparing for retirement and looking to protect part of your savings, or are you already well into retirement and looking for income now?

The table below shows factors to consider when choosing which type might make sense for you compared to, or (more typically) as a complement to a traditional portfolio.

Factors to Take Into Account When Considering Annuities

Factors to Consider

Immediate Fixed Annuities

Variable Annuities With GLWBs

Traditional Portfolio

Income guarantees*

Insurer pledges to make income payments that last for a fixed period of life.

Insurer generally pledges to protect minimum annual withdrawals from the variable annuity for life.

No guarantees on lifetime income; interest paid on bonds subject to credit risk of issue. May withdraw principal to supplement portfolio income.


No liquidity after a lump sum is turned over irrevocably to the annuity provider.

While annuities shouldn't be considered liquid, you do retain control over assets and aren't required to turn over lump sum in exchange for income; tax penalties or loss of guarantees may apply if annual withdrawals exceed a guaranteed minimum. Surrender charges may also apply for early withdrawals.

Most liquid, depending on investment choices and market performance.

Market participation

None-annuity provider assumes market risk.

Owner has potential to participate in market growth, after accounting for fees and withdrawals.

Maximum market participation, though accompanied by the most market risk.



You retain control over investments, subject to limitations on choices offered in annuity chosen; more flexible than immediate fixed annuities.

Most flexible--you retain full control over your investments.


Simplest form of protection against longevity risk; initial payout generally higher than variable annuities with GLWBs, but generally fixed.

Provides guaranteed withdrawals for life from a portfolio of investments; final payout generally lower than immediate annuities, but potential to increase depending on market performance.

A disciplined spending plan can lead to high confidence that assets won't be outlived, but does not promise lifetime income.


Cost embedded in up-front cost of purchases.

Annual investments fees, insurance costs, fees for optional riders, potential surrender charges and other possible expenses.

No added insurance or annuity fee; costs of underlying investments still apply.

It's possible to choose a combination of all three, depending on your needs. Each approach has pluses and minuses that can work in isolation or together. Immediate fixed annuities provide higher guaranteed income for the cost, while variable annuities with GLWBs help flexibly protect retirement income from market risk. And of course a traditional portfolio provides the most flexibility at the lowest cost of the three approaches, but doesn't include lifetime income protection.

How much should you invest?

As a general rule of thumb, we don't believe you should commit more than 50% of your investable assets to either type of annuity. Most investors will want some assets available for liquidity as well as full growth potential without additional fees.

If you value lifetime income, you may wish to consider predictable income sources such as lifetime income from annuities, to cover essential expenditures in retirement—then invest the rest for liquidity and growth. For more insights on how to build your retirement income, see Schwab's Retirement Income Fundamentals.

Next steps

If you need help learning about annuities, you're not alone. The details can be complex, so it'll help to talk to an unbiased professional who can weigh the pros and cons.

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Important Disclosures

Variable annuities are sold by prospectus only. You can request a prospectus by calling 888-311-4887 or by visiting Before purchasing a variable annuity, you should carefully read the prospectus and consider the annuity's investment objectives and all risks, charges, and expenses associated with the annuity and its investment options.


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