An annuity is a form of retirement income which provides a stable source of financial support, as it consists of returns on an investment which are paid on a regular schedule such as quarterly or annually. A fixed annuity, also called a flat or equal annuity, is a type of annuity which takes the form of consistent payments. It is more stable than a variable annuity, because the annuitant can be confident that he or she will make the same amount of money with each payment, but it is also not as flexible, because the return on an investment provided by a fixed annuity will not increase if the market improves.
To establish an annuity, most individuals work with a firm or financial planner who will purchase the annuity. While the annuity is being set up, options including the length of the annuity and whether it will be fixed or variable are discussed. A financial planner can usually provide sound advice about the best type of annuity to choose, depending on the health of the annuitant and other potential sources of retirement income. In general, a fixed annuity is a good choice for a single person who will be retiring without other sources of income. A variable annuity, however, might be a stronger tool for a couple, or someone with backup income.
In a fixed annuity, the payments will always be exactly the same. Usually, the annuity continues for life, or can be rolled over to a partner or specific descendants, depending on the firm issuing the annuity. The dependable form of income represented the annuity can be reassuring to retirees. However, a fixed annuity will not keep pace with inflation. If the retiree lives well beyond retirement age, he or she may experience weakened purchasing power because of the size of the annuity.
In the case of a variable annuity, the annuity usually has two components. The first is a fixed annuity component, to guarantee a baseline level of income. The amount of the fixed annuity will be discussed and included in the contract. The other component is variable, and will increase or decrease depending on the market. In a strong market, this may mean that the annuitant is making a substantial sum of money. In a weaker market, or if the investments that the annuity is based on are performing poorly, the annuitant may make little or no money from the variable aspect of the annuity.