If you’re exploring annuities to support your retirement goals, you may come across registered index-linked annuities (RILAs) and variable annuities.
Key Facts About RILA vs. Variable Annuities
- A registered index-linked annuity (RILA) is a hybrid product that offers a combination of market exposure and downside protection.
- A variable annuity provides more direct exposure to market returns with no guaranteed protection against losses.
While both products are tied to market performance, they each offer different risk and reward structures. To help you zero in on the ideal option and make an informed decision for your unique situation, we’ll dive deeper into the basics of RILAs and variable annuities as well as how they differ.
Key Differences Between RILA and Variable Annuity
You can think of a RILA as a mix between a fixed-index annuity and variable annuity. Also referred to as structured or buffered annuities, RILAs provide the potential for investment growth with minimal downside risk. If you opt for an RILA, you may choose a floor or buffer. An RILA floor, which caps your loss, is the maximum loss percentage you’re willing to absorb when the market is down. An RILA buffer, on the other hand, is the loss percentage the annuity company will absorb.
A variable annuity is correlated to an investment portfolio with multiple options or sub-accounts. Typically, these sub-accounts are mutual funds that invest in stocks, bonds or money market instruments — or they are a blend of all three. The performance of your investments will dictate whether your returns decrease or increase.
Put simply, an RILA is a hybrid product that blends market exposure and downside protection whereas a variable annuity offers the potential for greater turns but won’t protect you from market losses. RILAs may be better for those who want some market exposure with limited downside risk, while variable annuities might suit those who are more comfortable with higher risk for the potential of greater returns.
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Benefits and Drawbacks of RILAs
There are many benefits and drawbacks to choosing an RILA. On the one hand, RILAs are less complex than variable annuities. However, your RILA returns are capped. Here are some more advantages and disadvantages of RILAs.
Pros
- Potential for Higher Returns Than Fixed Annuities: RILAs often have higher caps than fixed annuities, paving the way for higher earning potential.
- Protection from Market Downturns: Since RILAs come with a buffer or floor, you’ll receive some degree of protection from market downturns.
- Less Complexity: RILAs are usually more straightforward and easier to understand than variable annuities.
Cons
- Loss Potential: RILAs require a higher risk tolerance than other annuity products as they don’t usually offer guaranteed returns.
- Capped Returns: Returns on RILAs are capped, so you might not earn as much as you’d like when the market is doing well.
- Not as Common: Compared to other types of annuity products, RILAs are newer and less popular, so you may have to do some research to find the best option for your situation.
Benefits and Drawbacks of Variable Annuities
There are also pros and cons to consider when choosing a variable annuity. Even though there are many options available, you could have to pay high fees for specific plans.
Pros
- Investment Flexibility: Variable annuities are customizable and allow you to choose investment options that align with your particular risk tolerance.
- Higher Growth Potential: With variable annuities, you don’t have to worry about earning caps and can, therefore, enjoy higher growth potential.
- Many Options Available: Many annuity providers offer variable annuities so you can easily find the ideal product for your unique needs.
Cons
- High Fees: Depending on the variable annuity you select, you might face hefty fees for investment management administration and mortality and expenses.
- No Protection from Market Downturns: When the market declines, the value of a variable annuity may go down in value.
- Complicated: You may need a financial advisor to help you understand the ins and outs of a complex variable annuity contract.
Which Annuity Is Right for You?
RILAs and variable annuities can both be beneficial if you’d like to diversify your retirement savings. Variable annuities might be right for you if you’re in the market for a long-term investment product with flexibility and can accept some volatility. RILAs may be worth exploring if you’re nearing retirement and want to leverage market gains while enjoying some level of protection during market downturns. A financial advisor can help you determine which option is best suited for your particular situation and goals.
Frequently Asked Questions
An RILA can be a solid choice if you’re approaching retirement and prefer a bit of protection from a declining market. A variable annuity may make more sense if you’re looking for a long-term investment vehicle and don’t mind the volatility.
While each company will dictate the fees of its RILA and variable annuity products, most charge administration, investment management and mortality and risk fees. You may also owe surrender charges if you withdraw your funds early.
In most cases, you can transfer an RILA or a variable annuity — or vice versa — through a 1035 exchange. However, check with your specific provider to confirm whether this is possible.
Yes, both RILAs and variable annuities serve as powerful retirement solutions. They can supplement other retirement vehicles you may already have, such as a 401(k) or IRA.
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Editor Norah Layne contributed to this article.
