Fixed annuity purchasers don't have to worry about an investment strategy; they're getting a guaranteed interest rate from the issuing company.

Fixed annuities and interest rates
Your money earns interest at a rate determined and guaranteed by the issuing company. This rate is stated in the contract, and the issuing company may reset it at certain intervals during the contract. An indexed annuity pays interest at a rate linked to an external reference point.

Initial and renewal interest rates
When you purchase your annuity, the issuing company may credit an initial interest rate for a certain period. Sometimes this rate reflects an additional bonus percentage. After the initial period expires, a new rate known as the renewal rate is set. The renewal rate is sometimes based on an external reference, as noted earlier.

There may also be a guaranteed minimum interest rate stated in your contract. This means your annuity is guaranteed to earn at least this rate (it may earn more).

Variable annuity purchasers are looking for more growth potential through their choice of investment options.

How the variable options work
Variable investment options are called subaccounts, and operate somewhat like mutual funds. Each is managed by a portfolio manager who invests your money according to guidelines that specify the types of stocks or bonds to be purchased and the investment approach. The guidelines may be broadly or narrowly defined according to the prospectus of each subaccount.

Variable annuity owners need to be sure their choice of options is in line with their personal goals, their tolerance for risk, and the number of years until their retirement. Make sure you understand the purpose and strategy of your variable options-and don't be afraid to ask questions of your financial professional-that's what he or she is paid for.

Set clear goals
Setting clear investment goals will help you better understand what you'll need to do in order to achieve them. The retirement worksheet can help you understand how much money you'll need when you retire.

Take the risk that's right for you-and no less
Any investment that keeps you up at night is too risky, but risk and reward go hand in hand. An investment that is too conservative might not get you where you want to go. For example, a money market fund might seem almost risk free, but the modest return of a money fund may not reach your retirement goals. So consider your goals and your tolerance for risk. (See understanding risk.)

Invest regularly
The regular investment of even modest amounts can have a significant effect on your retirement nest egg. Many annuities allow you to set up an automatic or systematic investment program where you regularly contribute a specific amount, regardless of market conditions. Keep in mind that this strategy doesn't guarantee a profit or protect against a loss in declining markets.