Can Annuities Lose Money?

by Gregory Hamel
Annuities are designed to provide income during retirement.

When it comes to saving for retirement, it is wise to start as early as possible so your money has a long time to grow, but some retirement savings products are geared toward older people who are near retirement age. Annuities are retirement plans sold by insurance companies that let you set cash aside on a tax-advantaged basis, and and that provide income payments during retirement.

Fixed Annuities

Annuities come in three basic types: fixed, variable and indexed. With a fixed annuity, you earn a guaranteed amount of interest on the cash you use to buy the annuity, and during retirement you receive income payments equal to a specific amount per dollar in your account. Since interest and payments are fixed, and the annuity provider issues a guarantee, you likely won't lose money with a fixed annuity, although returns on fixed plans tend to be relatively low. In addition, you could lose money if you withdraw your funds too soon after opening an account, since early withdrawals may be subject to surrender fees and tax penalties.

Variable Annuities

When you buy a variable annuity, your cash goes into investments, such as mutual funds, and the value of your account changes based on the performance of those investments. Since the value of investments can go up or down, the value of a variable annuity can also rise and fall. This means that it's possible to lose money with a variable annuity if the investments in your account don't perform well. Variable annuities also tend to have high fees, which increases the chances of losing money.

Indexed Annuities

Indexed annuities provide interest payments based on the performance of a stock index, such as the Dow Jones Industrial Average Index or S&P 500. Many indexed annuities do not apply negative changes of the index to the value of your account, meaning your account generally won't lose value even if the stock market performs poorly. On the other hand, some indexed annuities do allow contract values to fall. As with fixed annuities, it is also possible to lose money if you cash out early and face surrender charges.

Immediate Annuities

An immediate annuity is a special type of annuity where you pay a lump sum of cash and immediately start receiving monthly income payments for a certain period or for the rest of your life. Immediate annuities can be fixed or variable. With a fixed immediate annuity, the income payments you receive are determined in advance and do not change. With a variable immediate annuity, the income payments you receive can rise and fall over time.

About the Author

Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.

Photo Credits

  • Digital Vision./Digital Vision/Getty Images