A fixed annuity is a contract between you and an insurance company designed to help you grow money safely and provide a guaranteed stream of income later in life, typically during retirement. You give the insurance company a lump sum of money (or make payments over time), and in return, the insurance company guarantees to pay you a fixed interest rate on your money for a specific period. Later, when you're ready, you can convert that accumulated value into regular monthly payments that can last for a set number of years or even for the rest of your life.
Think of it like a reverse loan: instead of you borrowing money and paying it back with interest, you're giving money to the insurance company, and they're paying you back with interest—guaranteed. Unlike investments in the stock market, your principal (the money you put in) is protected, and you know exactly what rate of return you'll receive.
Fixed annuities are designed for people who want safety, predictability, and guaranteed growth without the risk of losing money due to market downturns.
Fixed annuities solve several important financial challenges:
- Protection from market risk: If you're worried about losing money in the stock market, a fixed annuity guarantees your principal is safe. Your money grows at a guaranteed rate regardless of what happens in the economy.
- Guaranteed income for life: One of the biggest fears in retirement is running out of money. Fixed annuities can provide guaranteed monthly income that you cannot outlive, similar to a pension or Social Security.
- Predictable growth: You know exactly what interest rate you're earning during the accumulation period. There are no surprises or fluctuations.
- Tax-deferred growth: The money inside your fixed annuity grows without being taxed each year. You only pay taxes when you withdraw the money, which can help your savings grow faster.
- Safety and stability: Fixed annuities are backed by the financial strength of the insurance company and, in many states, protected by state guaranty associations up to certain limits.
- Probate avoidance: Annuities pass directly to your named beneficiaries without going through probate court, saving time and legal costs.
Fixed annuities are particularly helpful for people nearing retirement who want to protect a portion of their savings while still earning a reasonable, guaranteed return.
Fixed annuities are designed for:
- Pre-retirees and retirees: People within 5–10 years of retirement (or already retired) who want to protect their savings and create guaranteed income.
- Conservative savers: Individuals who prioritize safety over high returns and want to avoid market volatility.
- People seeking guaranteed income: Anyone worried about outliving their savings and wanting a "personal pension" they cannot outlive.
- Those with other sources of income: People who have Social Security, pensions, or other assets and want to add a layer of guaranteed income to their retirement plan.
- People who want tax-deferred growth: Individuals who have maxed out other tax-advantaged accounts (like 401(k)s or IRAs) and want additional tax-deferred growth opportunities.
Fixed annuities are especially useful for people who have saved a lump sum of money and want to ensure it lasts throughout retirement without taking on investment risk.
Fixed annuities are NOT ideal for:
- Young investors seeking high growth: If you're in your 20s, 30s, or even 40s, and your primary goal is wealth accumulation, the stock market or growth-oriented investments may offer higher long-term returns. Fixed annuities are conservative and designed for stability, not aggressive growth.
- People needing immediate access to their money: Fixed annuities typically have surrender periods (often 5–10 years) during which you'll face penalties if you withdraw more than a certain percentage of your money. If you need flexibility or emergency access, this may not be the right product.
- High-net-worth individuals seeking tax advantages: While fixed annuities grow tax-deferred, the withdrawals are taxed as ordinary income (not capital gains). For wealthy individuals, other strategies may offer better tax treatment.
- People expecting inflation-beating returns: Fixed annuities offer guaranteed rates, but those rates may not keep pace with inflation over long periods. If inflation protection is a priority, other products (like inflation-indexed annuities) may be better suited.
- Individuals with short time horizons: If you'll need your money back within a few years, the surrender charges and lack of liquidity make fixed annuities a poor fit.
A licensed financial professional can help determine whether a fixed annuity aligns with your specific goals, timeline, and financial situation.
Fixed Annuity vs. Variable Annuity: A variable annuity allows you to invest in sub-accounts (similar to mutual funds), which means your money can grow faster—but it can also lose value. A fixed annuity guarantees your principal and a set interest rate, so you never lose money due to market performance.
Fixed Annuity vs. Indexed Annuity: An indexed annuity ties your growth to a stock market index (like the S&P 500) but with downside protection. You may earn higher returns than a fixed annuity in good market years, but your growth is capped. A fixed annuity offers a straightforward guaranteed rate with no caps, floors, or market ties.
Fixed Annuity vs. Certificate of Deposit (CD): Both are safe, but CDs are held at banks and insured by the FDIC. Fixed annuities are held at insurance companies and may offer higher interest rates. Additionally, annuities grow tax-deferred, while CD interest is taxed annually. However, annuities have surrender charges for early withdrawal, while CDs typically have shorter terms and fewer restrictions.
Fixed Annuity vs. Bonds: Bonds can lose value if interest rates rise. Fixed annuities guarantee your principal and interest rate. Additionally, bond interest is taxed annually, while annuity growth is tax-deferred.
Fixed Annuity vs. 401(k) or IRA: A 401(k) or IRA is an account where you choose investments (stocks, bonds, funds). Those investments carry risk. A fixed annuity is a contract that guarantees growth and can later provide guaranteed lifetime income. Many people use both: they accumulate wealth in 401(k)s during their working years, then transfer a portion to a fixed annuity to create guaranteed income in retirement.
Imagine a couple, David and Sarah, both age 60. They've worked hard and saved $200,000 in a taxable brokerage account. As they approach retirement in five years, they're nervous about market volatility. They don't want to risk losing a significant portion of their savings right before they stop working.
After meeting with a licensed financial advisor, they decide to move $100,000 into a fixed annuity with a guaranteed 4% annual interest rate for 10 years. Here's what happens:
During the accumulation phase (years 1–10), their $100,000 grows at 4% per year, tax-deferred. They don't pay taxes on the growth each year—the money compounds without interruption. By the end of 10 years, their annuity has grown to approximately $148,000.
At age 70, David and Sarah choose to annuitize their contract. This means they convert the accumulated value into a guaranteed monthly income stream. The insurance company calculates a payout based on their ages and life expectancy, and they begin receiving $900 per month for the rest of their lives—guaranteed. Even if they live to age 95 and beyond, the payments continue.
This guaranteed income supplements their Social Security benefits and gives them peace of mind. They no longer worry about stock market crashes or running out of money. The fixed annuity provides stability, predictability, and financial security throughout their retirement.
This is just one example of how a fixed annuity works in real life. Actual payouts and rates vary based on age, interest rates, product features, and the insurance company's guarantees.
- Guaranteed principal protection: Your money is safe. Unlike stocks or mutual funds, you cannot lose your initial investment due to market downturns.
- Guaranteed interest rate: You know exactly what you'll earn during the accumulation period. There are no surprises.
- Tax-deferred growth: You don't pay taxes on your earnings each year. The money compounds faster because it's not being reduced by annual taxes.
- Guaranteed lifetime income option: You can convert your annuity into a stream of income you cannot outlive—like creating your own personal pension.
- No contribution limits: Unlike 401(k)s and IRAs, there's no annual limit on how much you can put into an annuity (though tax treatment differs for qualified vs. non-qualified annuities).
- Probate avoidance: Annuities pass directly to your named beneficiaries without going through probate court, saving time and legal costs.
- Simplicity: Fixed annuities are easy to understand. You're not choosing investments or monitoring markets. The insurance company handles everything.
- Limited liquidity: During the surrender period (typically 5–10 years), you'll face penalties for withdrawing more than a certain percentage (usually 10% per year). If you need access to large amounts of cash quickly, this can be a drawback.
- Potential for lower returns: While your principal is protected, the guaranteed interest rate may be lower than what you could earn in the stock market over the long term. Fixed annuities prioritize safety over growth.
- Ordinary income tax treatment: When you withdraw money, it's taxed as ordinary income (not capital gains). For high-income individuals, this can result in higher taxes compared to other investment strategies.
- Inflation risk: If inflation rises significantly, the fixed payments you receive may lose purchasing power over time. Some annuities offer inflation riders, but these typically reduce your initial payout.
- Fees and surrender charges: If you withdraw funds early, you may face surrender charges. Additionally, some annuities have administrative fees or rider costs.
- Reliance on insurance company strength: Your annuity is only as secure as the insurance company backing it. It's important to choose a financially strong, highly rated carrier.
A licensed professional can help you weigh these tradeoffs against your specific needs and determine if a fixed annuity fits your overall retirement plan.
Ask yourself these questions:
- Am I within 5–10 years of retirement, or already retired?
- Do I have a lump sum of money I want to protect from market risk?
- Am I more concerned about safety and guarantees than high growth?
- Do I want guaranteed income I cannot outlive?
- Can I afford to keep this money in the annuity for at least 5–10 years without needing large withdrawals?
- Do I already have emergency savings outside of this annuity?
- Am I looking for tax-deferred growth?
If you answered "yes" to most of these questions, a fixed annuity may be a good fit. However, every person's situation is unique. A licensed financial advisor can review your full financial picture and recommend whether a fixed annuity aligns with your goals.
A fixed annuity typically serves as the stability and income foundation in a diversified retirement plan. Most financial professionals recommend a balanced approach:
- Growth assets (stocks, mutual funds): For long-term appreciation and wealth building.
- Guaranteed income (annuities, pensions, Social Security): For predictable cash flow and peace of mind.
- Liquid savings (savings accounts, money market funds): For emergencies and short-term needs.
- Insurance protection (life insurance, long-term care): For protecting against catastrophic risks.
A fixed annuity fits into the "guaranteed income" category. It's not meant to replace all your retirement savings—it's meant to complement them by providing a guaranteed baseline of income you can count on, no matter what happens in the economy.
Many retirees use a strategy called the "retirement income floor," where they ensure their essential expenses (housing, food, healthcare) are covered by guaranteed sources (Social Security, pensions, annuities), and then use growth assets to fund discretionary spending (travel, hobbies, gifts).
- Accumulation Phase: The period during which you contribute money to the annuity and it grows at the guaranteed interest rate before you begin taking income.
- Annuitize: The process of converting your annuity's accumulated value into a stream of guaranteed income payments.
- Beneficiary: The person or entity you designate to receive the annuity's value if you pass away before annuitizing or during the payout phase.
- Guarantee Association: State-backed programs that protect annuity contract holders (up to certain limits) if an insurance company becomes insolvent.
- Ordinary Income: Income taxed at your regular income tax rate (as opposed to capital gains rates).
- Principal: The original amount of money you invest in the annuity.
- Surrender Period: The time frame (typically 5–10 years) during which you'll face penalties for withdrawing more than a certain percentage of your annuity's value.
- Surrender Charge: A penalty fee charged by the insurance company if you withdraw funds beyond the allowed limit during the surrender period.
- Tax-Deferred Growth: Earnings that are not taxed each year; taxes are paid only when you withdraw the money.
Coverage examples are for educational purposes only. Actual premiums, interest rates, and payout amounts depend on age, health, product design, current interest rate environment, carrier guidelines, and state regulations. Illustrations provided by licensed advisors are hypothetical and not guaranteed.
The information provided herein is for educational purposes only. Our licensed insurance and financial professionals are qualified to provide personalized advice during individual consultations. This general content should not replace a personal consultation regarding your specific financial situation. Biblical references are from the New International Version (NIV) unless otherwise noted.
Purchasing a fixed annuity involves several clear steps:
Step 1: Research and consultation
Meet with a licensed insurance agent or financial advisor who specializes in annuities. They'll assess your financial situation, retirement goals, risk tolerance, and timeline to determine if a fixed annuity is appropriate.
Step 2: Choose an insurance company and product
Your advisor will present options from highly rated insurance companies. You'll compare guaranteed interest rates, surrender periods, withdrawal provisions, and any optional riders (add-ons).
Step 3: Complete an application
Unlike life insurance, fixed annuities typically do not require medical underwriting. You'll provide basic information (name, age, Social Security number, beneficiary designation, funding source).
Step 4: Fund the annuity
You can fund a fixed annuity with:
- A lump sum from savings, a CD, or a taxable brokerage account
- A rollover from a 401(k), 403(b), or IRA (for qualified annuities)
- Periodic payments over time (less common with fixed annuities)
Step 5: Policy issuance
The insurance company issues your annuity contract. You'll receive a document outlining your guaranteed interest rate, surrender schedule, withdrawal rules, and payout options.
Step 6: Accumulation phase begins
Your money begins earning the guaranteed interest rate immediately. During this phase, you can typically track your account value online or through statements.
The entire process usually takes 1–3 weeks from application to funding.
During the accumulation phase, your money grows at the guaranteed interest rate specified in your contract. Here's how it works:
- Fixed interest crediting: Each year (or each contract period), the insurance company credits your account with the guaranteed interest. For example, if you invest $100,000 at 4% per year, you'll earn $4,000 in the first year, bringing your balance to $104,000. In the second year, you earn 4% on $104,000, and so on—this is compound growth.
- Tax deferral: The interest you earn is not taxed each year. It compounds tax-deferred, meaning your account grows faster than a taxable account where you'd owe taxes annually.
- Penalty-free withdrawals: Most fixed annuities allow you to withdraw up to 10% of your account value each year without paying a surrender charge. This provides some liquidity for emergencies.
- No management required: Unlike variable annuities or brokerage accounts, you don't make investment decisions during the accumulation phase. The insurance company manages everything behind the scenes.
- Optional additions: Some contracts allow you to add more money during the accumulation phase, though rates and terms may differ for new contributions.
The accumulation phase typically lasts 5–30 years, depending on your age and when you plan to start taking income. During this time, your primary goal is to grow your savings safely and predictably.
The surrender period is a time frame (typically 5–10 years) during which the insurance company discourages you from withdrawing large amounts of money. If you withdraw more than the allowed percentage (usually 10% per year), you'll face a surrender charge—a penalty that reduces the amount you receive.
Why does the surrender period exist?
Insurance companies invest your premium in long-term, conservative assets (like bonds) to generate the guaranteed returns they promise you. When you commit to keeping your money in the annuity for a set period, the insurance company can make longer-term investments that earn higher returns. This is how they can afford to pay you a guaranteed rate and still make a profit.
If you withdraw a large sum early, the insurance company may have to sell those long-term investments at a loss. The surrender charge protects the company from this financial risk and ensures they can honor their commitments to all annuity holders.
How surrender charges work:
Surrender charges typically decrease over time. For example:
- Year 1: 9% surrender charge
- Year 2: 8%
- Year 3: 7%
- ...and so on, until the surrender period ends.
Once the surrender period is over, you can withdraw your full account value without penalty (though taxes and IRS penalties may still apply if you're under age 59½).
Important note: Most contracts allow penalty-free withdrawals of up to 10% per year, even during the surrender period. This provides access to your money for emergencies or planned expenses.
When you're ready to start receiving payments, you annuitize your contract. This means you convert your accumulated account value into a guaranteed stream of income. Here's how it works:
Step 1: Choose a payout option
The insurance company offers several payout structures:
- Life-only payout: Payments continue for as long as you live, but stop when you pass away (even if you've only received a few payments).
- Life with period certain: Payments continue for your lifetime, but if you pass away before a certain number of years (e.g., 10 or 20 years), your beneficiaries receive the remaining payments.
- Joint and survivor payout: Payments continue for as long as either you or your spouse is alive.
- Fixed period payout: Payments continue for a set number of years (e.g., 15 or 20 years), regardless of whether you're alive.
Step 2: The insurance company calculates your payment
The payout amount depends on:
- Your account value at the time of annuitization
- Your age (and your spouse's age, if applicable)
- The payout option you choose
- Current interest rates and life expectancy tables
Step 3: Payments begin
Once annuitization starts, you receive regular monthly (or quarterly/annual) payments. These payments are guaranteed for the duration of the payout period you selected. You cannot change your payout option after annuitization begins, and you typically cannot access the lump sum value anymore.
Your monthly income payment depends on several key factors:
- Account value at annuitization: The more money accumulated in your annuity, the higher your monthly payment.
- Your age: The older you are when you start taking payments, the higher your monthly income (because the insurance company expects to make payments for fewer years).
- Payout option selected: Life-only payouts are higher than life-with-period-certain or joint-and-survivor options, because the insurance company's risk is lower.
- Interest rate environment: Annuity payouts are influenced by current interest rates. When rates are higher, payouts are typically higher.
- Gender (in some states): Some states allow gender-based pricing, meaning women may receive slightly lower monthly payments because they statistically live longer than men.
- Riders or add-ons: Optional features (like inflation protection or enhanced death benefits) reduce your monthly payout but provide additional protections.
A licensed advisor can provide personalized illustrations showing exactly how much income you'd receive based on your specific situation.
Riders are optional features you can add to your fixed annuity to customize it for your needs. Each rider comes with a cost—either an upfront fee or a reduction in your guaranteed interest rate or income payout.
Common riders include:
- Guaranteed minimum withdrawal benefit (GMWB): Ensures you can withdraw a certain percentage of your initial premium each year, even if your account value drops to zero. This is more common in variable annuities but sometimes offered in fixed products.
- Inflation protection rider: Increases your income payments each year by a set percentage (e.g., 2% or 3%) to help keep pace with inflation. This reduces your starting payment amount.
- Enhanced death benefit: Guarantees that your beneficiaries receive at least your original premium (or a higher amount) if you pass away before annuitizing.
- Long-term care rider: Allows you to access additional funds or higher payouts if you need long-term care services.
- Return of premium rider: Guarantees your beneficiaries receive any remaining premium if you pass away during the accumulation phase.
Tradeoffs:
Each rider you add either costs money or reduces your guaranteed rate or income. It's important to carefully evaluate whether the benefit justifies the cost. A licensed advisor can help you determine which riders (if any) make sense for your situation.
Fixed annuities offer tax-deferred growth, but it's important to understand how taxes work at different stages.
During the accumulation phase:
You do not pay taxes on the interest your annuity earns each year. This allows your money to compound faster compared to a taxable account.
When you withdraw money:
Withdrawals are taxed as ordinary income, not capital gains. The IRS uses a "last-in, first-out" (LIFO) rule, meaning earnings come out first and are taxed. Once you've withdrawn all your earnings, the principal comes out tax-free (since you already paid taxes on that money when you earned it).
If you annuitize:
Each payment consists of two parts: a portion that's considered a return of principal (not taxed) and a portion that's considered earnings (taxed as ordinary income). The IRS uses an "exclusion ratio" to determine how much of each payment is taxable.
Early withdrawal penalties:
If you withdraw money before age 59½, you may owe a 10% IRS penalty in addition to ordinary income taxes. However, several exceptions exist that may waive this penalty, including:
- Death
- Disability
- Substantially equal periodic payments (SEPP)
- First-time home purchase (up to $10,000)
- Qualified higher education expenses
- Certain medical expenses exceeding a percentage of your adjusted gross income
Each exception has specific IRS requirements. Consult a tax professional or licensed advisor to determine if you qualify for any of these exceptions.
Qualified vs. non-qualified annuities:
- Qualified annuities are funded with pre-tax money (like a 401(k) rollover). All withdrawals are fully taxable.
- Non-qualified annuities are funded with after-tax money. Only the earnings are taxable; the principal is not.
Upon death:
If you pass away before annuitizing, your beneficiaries typically receive the account value and must pay ordinary income taxes on any earnings. Some annuities allow beneficiaries to spread the tax liability over five years.
A tax professional or financial advisor can help you understand how a fixed annuity fits into your specific tax situation.
Most fixed annuities allow penalty-free withdrawals of up to 10% of your account value per year, even during the surrender period. This provides flexibility for emergencies or planned expenses.
If you need to withdraw more than 10%:
You'll face a surrender charge, which is a percentage of the amount withdrawn. For example, if your surrender charge is 7% and you withdraw $20,000, you'll pay $1,400 in penalties, leaving you with $18,600.
Exceptions to surrender charges:
Many annuities include provisions that waive surrender charges in certain situations:
- Terminal illness or nursing home confinement
- Disability
- Death (beneficiaries receive full account value)
IRS penalties:
Even if you avoid the surrender charge, if you're under age 59½, you may owe a 10% IRS penalty on the earnings portion of your withdrawal (in addition to ordinary income taxes), unless you qualify for one of the IRS exceptions mentioned in section 2g.
Important consideration:
Before purchasing a fixed annuity, ensure you have adequate emergency savings outside the annuity. This prevents you from needing to access annuity funds early and facing penalties.
Mistake #1: Not understanding the surrender period
Many people purchase a fixed annuity without realizing they'll face penalties for large withdrawals. Always confirm the surrender schedule and ensure you have other liquid savings.
Mistake #2: Choosing the wrong payout option
Once you annuitize, you cannot change your payout option. If you choose a life-only payout and pass away early, your family receives nothing. Consider life-with-period-certain or joint-and-survivor options if protecting your family is a priority.
Mistake #3: Ignoring inflation
Fixed annuities provide guaranteed payments, but those payments may lose purchasing power over time if inflation rises. Consider adding an inflation rider or keeping some growth assets in your portfolio.
Mistake #4: Failing to name beneficiaries
If you don't designate beneficiaries, your annuity may go through probate, delaying distribution and increasing costs. Always keep your beneficiary designations up to date.
Mistake #5: Putting all retirement savings in one annuity
Fixed annuities are excellent for guaranteed income, but they shouldn't be your only retirement asset. Maintain a diversified portfolio that includes growth assets, liquid savings, and insurance protection.
Mistake #6: Choosing a weak insurance company
Your annuity is only as strong as the company backing it. Work with a licensed advisor who represents multiple, highly rated carriers.
Mistake #7: Withdrawing money before age 59½
Early withdrawals trigger IRS penalties and taxes. If you're under 59½, ensure you have other funds available for unexpected expenses.
Before committing to a fixed annuity, ask your licensed advisor these important questions:
- What is the guaranteed interest rate, and how long is it guaranteed?
- What is the surrender period, and what are the surrender charges?
- Can I withdraw up to 10% per year without penalties?
- What are the fees (if any) associated with this annuity?
- What payout options are available when I'm ready to take income?
- What riders are available, and how much do they cost?
- What happens to my money if I pass away before annuitizing?
- Is this a qualified or non-qualified annuity, and what are the tax implications?
- What is the financial strength rating of the insurance company?
- Can I add more money to this annuity in the future?
A reputable advisor will answer these questions clearly and provide you with written illustrations showing how your annuity will perform under different scenarios.
- Annuitization: The process of converting your annuity's accumulated value into a guaranteed stream of income payments.
- Exclusion Ratio: An IRS calculation that determines how much of each annuity payment is taxable versus non-taxable.
- Joint and Survivor Payout: A payout option where payments continue for as long as either you or your spouse is alive.
- Last-In, First-Out (LIFO): An IRS rule stating that earnings are withdrawn first (and taxed) before principal can be accessed.
- Life-Only Payout: A payout option where payments continue only for your lifetime and stop when you pass away.
- Life with Period Certain: A payout option where payments continue for your lifetime, but if you pass away early, your beneficiaries receive payments for a guaranteed minimum number of years.
- Non-Qualified Annuity: An annuity funded with after-tax dollars (not from a retirement account). Only the earnings are taxable upon withdrawal.
- Qualified Annuity: An annuity funded with pre-tax dollars (such as a 401(k) or IRA rollover). All withdrawals are fully taxable.
- Rider: An optional add-on feature that customizes your annuity (such as inflation protection or enhanced death benefits), typically at an additional cost.
- Substantially Equal Periodic Payments (SEPP): An IRS-approved method for taking penalty-free early withdrawals from retirement accounts by committing to regular, calculated payments.
- Surrender Charge: A penalty fee for withdrawing more than the allowed amount during the surrender period.
- Surrender Period: The time frame during which large withdrawals trigger penalty fees.
Many people believe annuities are overly complex or risky, but this perception often stems from confusion between different types of annuities.
The reality:
Fixed annuities are one of the simplest and safest financial products available. You give the insurance company a sum of money, they guarantee you a fixed interest rate, and later they guarantee you a stream of income. There are no investment choices, no market exposure, and no risk of losing principal. The complexity often associated with annuities comes from variable or indexed annuities, which involve market-linked growth and optional riders. Fixed annuities, by contrast, are straightforward and transparent.
Regarding safety:
Fixed annuities are backed by the financial strength of the issuing insurance company and, in most states, protected by state guaranty associations (up to certain limits). When you choose a highly rated insurance company, your money is very secure.
Key takeaway:
Don't let fear of complexity or risk stop you from considering a fixed annuity. Work with a licensed advisor who can explain the product clearly and help you understand exactly what you're purchasing.
Some people worry that if the insurance company goes out of business, their annuity will be worthless.
The reality:
Insurance companies are heavily regulated and required to maintain substantial reserves to back their obligations. Additionally, every state has a guaranty association that protects annuity holders if an insurance company becomes insolvent. These associations typically cover annuity values up to $250,000, though coverage limits vary by state. State guaranty association coverage generally ranges from $100,000 to $500,000 depending on your state of residence. You can verify your specific state's coverage limit by visiting your state insurance department's website or contacting your licensed advisor.
Furthermore, insurance companies are regularly evaluated by independent rating agencies (like A.M. Best, Moody's, and Standard & Poor's). By choosing a company with strong financial ratings (A or higher), you dramatically reduce the likelihood of insolvency.
Key takeaway:
While no investment is 100% risk-free, fixed annuities issued by highly rated insurance companies are among the safest retirement products available. Always verify the financial strength of the carrier and confirm your state's guaranty association coverage limit before purchasing.
Many people believe that once they purchase a fixed annuity, their money is completely locked away.
The reality:
Most fixed annuities allow you to withdraw up to 10% of your account value per year without penalties, even during the surrender period. This provides liquidity for emergencies or planned expenses. Additionally, many contracts include provisions that waive surrender charges in cases of terminal illness, nursing home confinement, or disability.
It's true that large withdrawals during the surrender period trigger penalties, but this is clearly disclosed upfront. The surrender period exists to protect the insurance company's long-term investment strategy, which allows them to pay you guaranteed returns.
Key takeaway:
Fixed annuities are not as illiquid as many people think. With proper planning and adequate emergency savings outside the annuity, you can enjoy the benefits of guaranteed growth and income without sacrificing financial flexibility.
Some individuals assume fixed annuities are only suitable for high-net-worth individuals or large retirement portfolios.
The reality:
Fixed annuities can benefit people across a wide range of income levels. Even a modest annuity (funded with $25,000–$50,000) can provide meaningful guaranteed income to supplement Social Security or a pension. The key is not how much you invest, but whether the annuity aligns with your financial goals and provides the security and income you need.
In fact, people with smaller retirement savings often benefit the most from fixed annuities because they cannot afford to lose principal due to market downturns. A guaranteed return and guaranteed income can make a significant difference in financial peace of mind.
Key takeaway:
Don't assume you need a six-figure portfolio to benefit from a fixed annuity. Speak with a licensed advisor to explore options that fit your budget and retirement goals.
Some people avoid fixed annuities because they believe they can earn higher returns by staying fully invested in stocks or mutual funds.
The reality:
Historically, the stock market has provided higher long-term returns than fixed annuities—but with significantly higher risk. The purpose of a fixed annuity is not to maximize growth; it's to provide safety, predictability, and guaranteed income.
As you approach retirement, protecting your principal becomes just as important as growing it. A market downturn at the wrong time (just before or early in retirement) can devastate your savings. Fixed annuities eliminate this "sequence of returns risk" by guaranteeing your principal and interest rate.
Many financial professionals recommend a balanced approach: keep a portion of your portfolio in growth assets (stocks, mutual funds) for long-term appreciation, and allocate another portion to fixed annuities for guaranteed income and stability.
Key takeaway:
Fixed annuities are not meant to replace growth investments—they complement them. The goal is to create a diversified retirement plan that balances growth, safety, and guaranteed income.
There's a widespread belief that all annuities are loaded with high fees and commissions that reduce your returns.
The reality:
Fixed annuities typically have no annual fees. Unlike variable annuities, which may charge investment management fees, mortality and expense fees, and rider fees, fixed annuities are straightforward: the insurance company pays you a guaranteed interest rate, and they make their profit from the spread between what they earn on their investments and what they pay you.
The main cost associated with fixed annuities is the surrender charge, which only applies if you withdraw more than the allowed percentage during the surrender period. This is clearly disclosed in your contract.
Optional riders (like inflation protection or enhanced death benefits) do come with costs, but these are optional—you can choose a basic fixed annuity with no riders and no ongoing fees.
Key takeaway:
Not all annuities are created equal. Fixed annuities are among the most transparent and fee-friendly annuity products available. Always review the contract and ask about any fees before purchasing.
Some people fear that if they annuitize and pass away shortly after, the insurance company will keep the remaining funds and their family will receive nothing.
The reality:
This concern is valid only if you choose a life-only payout option, which provides the highest monthly payment but offers no death benefit. However, most people do not choose life-only payouts. Instead, they opt for:
- Life with period certain: Guarantees payments for at least a set number of years (e.g., 10 or 20 years), even if you pass away early.
- Joint and survivor: Continues payments to your spouse for their lifetime.
- Beneficiary provisions during accumulation: If you pass away before annuitizing, your beneficiaries receive the full account value.
By selecting the right payout option and naming beneficiaries, you can ensure your family is protected even if something happens to you unexpectedly.
Key takeaway:
With proper planning and the right payout option, your fixed annuity can provide both lifetime income for you and financial protection for your loved ones.
Some people feel uncomfortable handing over a lump sum to an insurance company and giving up direct control.
The reality:
When you purchase a fixed annuity, you're entering into a contract with clear terms: the insurance company guarantees you a fixed interest rate and (if you annuitize) a guaranteed income stream. You're not losing control—you're exchanging liquidity for security and predictability.
This tradeoff is intentional. By committing your funds to the insurance company for a set period, you receive guarantees you cannot get anywhere else. If you need more flexibility, you can keep a portion of your savings in liquid accounts and use the annuity for long-term guaranteed income.
It's also worth noting that during the accumulation phase, you retain significant control: you can make penalty-free withdrawals up to 10% per year, change beneficiaries, and (in some cases) add funds or adjust features.
Key takeaway:
A fixed annuity is a tool for a specific purpose—guaranteed safety and income. It's not meant to replace all your savings or investments. When used appropriately as part of a diversified plan, it provides financial security without sacrificing overall flexibility.
- Guaranty Association: State-backed programs that protect annuity contract holders (up to certain limits) if an insurance company becomes insolvent.
- Insolvency: When an insurance company is unable to meet its financial obligations to policyholders.
- Liquidity: The ease with which you can access your money without penalties or restrictions.
- Rating Agencies: Independent organizations (like A.M. Best, Moody's, and Standard & Poor's) that evaluate the financial strength of insurance companies.
- Sequence of Returns Risk: The risk that market downturns early in retirement can significantly reduce your portfolio's longevity, even if long-term average returns are positive.
- State Guaranty Association: A safety net that protects annuity holders (up to a certain amount, typically $250,000) if an insurance company fails.