Have you been pitched a variable annuity by an advisor? On the surface, it might sound like a great way to invest for retirement. But once you look deeper, you’ll find that variable annuities come with high fees, market risk, and unpredictable income.
A better alternative for many retirees is a Fixed Indexed Annuity (FIA), which provides guaranteed income without the risk of market losses. I’m going to break down the key differences between these two types of annuities, so you can make a smarter financial decision.
What Are Variable Annuities?
A variable annuity is an investment product that allows your money to grow based on market performance. While that may sound good, there are serious risks to consider.
Key Features of Variable Annuities:
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- Market-Based Growth – Funds are invested in stocks, bonds, and mutual funds through “subaccounts”.
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- High Fees – Average fees are around 3.5% per year, which can eat away at your account value.
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- Income Risk – Payments can decrease over time depending on market conditions.
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- Complex Structure – Different share classes (A, B, C, D, I, X) make them difficult to understand.
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- Loss of Principal – Your money is exposed to market downturns, meaning you can lose your investment.
Why Is This a Problem?
Many people buy variable annuities thinking they’ll get stable retirement income, but in some cases, the income is not guaranteed. If the market underperforms and fees drain the account, retirees may receive far less money than expected.
What Are Fixed Indexed Annuities?
A Fixed Indexed Annuity (FIA) is designed to provide a balance of growth potential and protection. Unlike variable annuities, an FIA is an insurance product that is not directly tied to the stock market, which means your money is shielded from losses.
Key Features of Fixed Indexed Annuities:
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- Guaranteed Income – Payments are contractually guaranteed and won’t decrease.
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- Market Protection – No risk of losing your money due to market downturns.
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- Lower Fees – Typical income rider fees are around 1.1% (much lower than variable annuities).
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- Stable Growth – Interest is based on an index (like the S&P 500) but without direct exposure to losses.
With an FIA, you don’t have to worry about your income dropping later in retirement. That’s why so many retirees choose Fixed Indexed Annuities over Variable Annuities.
The Fee Factor: How Costs Impact Your Retirement Income
One of the biggest problems with variable annuities is the cost. Fees can quickly eat away at your account value, making it harder for your money to last through retirement.
| Fee Type | Avg. Variable Annuity | Avg. Fixed Indexed Annuity |
| Administration Fee | $35 per year | None |
| Mortality & Expense Fee | 1.65% | None |
| Income Rider Fee | 1.15% | 1.1% |
| Investment Fund Fees | 0.53% – 1.1% (avg 0.815%) | None |
| Total Fees | 3.6% per year | 1.1% per year |
With fees averaging 3.6% per year, a variable annuity can drain your account faster than you might expect. This is why many retirees see their income cut in half in later years.
How Variable Annuities Lose to Fixed Indexed Annuities Over Time
When choosing an annuity, it’s not just about how much income you start with—it’s about how much income you’ll have throughout retirement.
At first, a variable annuity might seem like the better option because some of them can start with a higher payout. But over time, high fees, market volatility, and lack of guarantees can cause that income to drop—sometimes by 50% or more.
Let’s take a real-world example and compare two different cases for a 65-year-old couple investing $100,000:
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- Starting income immediately at age 65
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- Deferring income for 5 years until age 70
Case Study 1: Taking Income Immediately at 65
| Scenario | Variable Annuity (Best Case) | Fixed Indexed Annuity |
| Starting Income (65 years old) | $8,100 per year (Not Guaranteed) | $7,100 per year (Guaranteed) |
| Income at Age 95 | $176,000 (Total, but not guaranteed) | $213,000 (Guaranteed) |
| Total Fees | 3.6% per year | 1.3% per year |
Case Study 2: Deferring Income Until Age 70
| Scenario | Variable Annuity (Deferred 5 Years) | Fixed Indexed Annuity (Deferred 5 Years) |
| Starting Income (70 years old) | $11,000 (Not Guaranteed) | $11,325 (Guaranteed) |
| Income at Age 95 | $197,800 (Total, but not guaranteed) | $283,000 (Guaranteed) |
| Total Difference | -30% Less Income | +43% More Income |
What Happened to the Variable Annuity?
At first glance, the Variable Annuity seems competitive—it starts with a higher payout than the Fixed Indexed Annuity in both cases. But as the years go by, the cracks start to show:
🔹 By age 81, the variable annuity’s income dropped by more than 50%—leaving retirees with far less money at a time when they need it most.
🔹 High annual fees—At 3.6% per year, these fees drained the account faster than it could recover.
🔹 Market volatility—The underlying sub-accounts didn’t perform well enough to sustain the promised income.
🔹 No guaranteed floor—Because there’s no protection against market downturns, the income wasn’t locked in.
Why the Fixed Indexed Annuity Wins Over Time
✔️ Income is fully guaranteed—no market dependency, no sudden reductions.
✔️ By age 95, the FIA provided up to 43% more total income—that’s an extra $85,000+ in retirement.
✔️ Lower fees—At 1.3% per year, more money goes to actual income.
The Bottom Line: Stability vs. Risk
A Variable Annuity might look better at first, but the long-term risks are undeniable. High fees and market fluctuations mean your income could be cut in half later in retirement—when you need it the most.
A Fixed Indexed Annuity, on the other hand, delivers exactly what it promises—steady, predictable income for life, without market losses. It’s the smarter choice for retirees who want to protect their income for the long haul.
So the question is simple:
👉 Do you want a retirement income that’s guaranteed, or one that could vanish when you need it most?
Should You Avoid Variable Annuities?
Years ago, some Variable Annuities were actually decent products. They offered strong income guarantees, reasonable fee structures, and benefits that made sense for certain retirees. But over time, the companies that issued these annuities started to realize they had overpromised.
See, when an insurance company offers a guaranteed benefit, they have to make sure they can actually pay for it—no matter what happens in the market. Many of these companies assumed they’d be able to earn enough from the investments inside the annuity to cover those benefits. But when interest rates dropped and market conditions changed, they found themselves in a bind.
Rather than continue honoring the generous benefits they had once advertised, many companies had to retool their offers which led to increased fees and lower payouts. And some, like Transamerica and Prudential, just left the Variable Annuity business entirely.
What Does That Tell You?
If a major insurance company decides it can no longer afford to offer a product, that should be a huge red flag. These companies have some of the smartest actuaries and financial analysts in the world, and they ran the numbers—they saw that Variable Annuities were no longer a good deal for them or their clients.
So here’s the real question: If Variable Annuities were too risky for the companies selling them, why should retirees trust them for income?
Final Thoughts: Get a Second Opinion on Your Annuity
Variable Annuities might seem appealing at first, but once you break down the numbers, they often don’t stack up against Fixed Indexed Annuities.
If you own a Variable Annuity or have been pitched one, it’s important to get a second opinion. The best way to do that? Schedule a short call using my calendar.
Podcast Episode 61: Variable Annuities vs Fixed Indexed Annuities
Download Episode 61: Variable Annuities vs Fixed Indexed Annuities on Apple Podcast