Fixed Annuity Guide


Fixed annuities are interest-based vehicles similar to bank-issued CDs, but geared specifically towards retirement savings. Typically, a lump-sum of cash locks in an interest rate ranging from 3% to 10% for a period of 3 to 15 years. The initial deposit — otherwise called the premium — can range from $5,000 to $1,000,000.

Fixed annuities are very low risk, have more liquidity than CDs, are tax-deferred, and typically offer higher yields than bonds, CDs, treasuries, or money market accounts.

A fixed annuity uses one of two distribution models: immediate or deferred. Immediate fixed annuities start issuing monthly payments right away, until the initial premium plus interest gets paid out. Deferred annuities don’t pay out until the end of their term, compounding interest like a typical retirement savings account.

Most fixed annuities also feature a lifetime income option — allowing you to convert accumulated savings into a guaranteed monthly income for the rest of your life. This feature is highly desirable to many retirees and sets annuities apart from other types of retirement investments.

Fixed Annuity Features

Fixed annuities vary, but generally feature:

  • Single Premium — One up-front payment and that’s it. Future investments require purchase of a new annuity.
  • Guaranteed Rate — Contract locks in a fixed interest rate for x number of years, like a CD.
  • Very Low Risk — Money can only be lost if the insurance company becomes insolvent and your investment exceeds Annuity State Guaranty Limits.
  • Retirement Income — Ideal source of secure monthly retirement checks. Retire with peace of mind and steady growth.
  • 3%-10% Return — Solid returns for essentially no-risk investment. Better than CDs, especially at longer terms.
  • Lifetime Income — An optional lifetime provision guarantees paychecks for life. No worries about outliving your retirement savings.
  • 1-10 Year Term — Fixed annuities are available for short, medium, or long terms. Longer terms yield higher rates.
  • Hassle Free — No micromanagement. Sign the contract, pay the premium, receive paychecks for life.
  • Life Insurance — An optional life insurance provision offers death benefits to loved ones. Save money by foregoing a separate life policy.
  • Unlimited Contributions — Invest as much as you want, buy as many annuities as you like. Unlike a 401(k) or IRA.
  • Inheritance — Bequeath money to loved ones probate-free. Avoid estate/death taxes.
  • Inflation Hedge — Beat inflation and then some. CDs and money market accounts barely cover CPI.
  • Tax-Free Gifts — Gift up to $10,000 per individual, per year, tax-free. Gift money to an unlimited number of individuals.

For more discussion on each feature, read: Fixed Annuity Features.

Fixed Annuity Performance

You can expect solid, guaranteed growth from an investment in a fixed annuity as long as you don’t terminate prematurely. In the case of deferred fixed annuities, tax-deferral is going to add up and compound, earning substantially more than a CD, money market account, or even a mutual fund.

Want to see some real numbers? In this next section we compare a typical fixed annuity, CD, and money market account. Visit Fixed Annuity Performance for an actual example of fixed annuity growth, with graphs of the tax-deferral benefit in action.

Types of Fixed Annuity

Fixed annuities come in three flavours: fixed immediate, fixed deferred, and CD type.

Immediate and deferred specify how payments are made, either in monthly installments or after a specified period of time (typically at the end of the contract term). Read more about the features of an Immediate Fixed Annuity or a Deferred Fixed Annuity.

CD type annuities are CD/annuity hybrids. They function just like regular fixed annuities except for the scope of their guaranteed rate. What advantages does a CD annuity offer? Find out more about CD Annuity features.

Finding the Best Fixed Annuity

The key to buying a high-yield fixed annuity is shopping at a time when interest rates are high. Moreover, if you can handle a longer term (10+ years), you can get a much better rate. Of course, high-yield isn’t always what’s best. The best annuity is one that’s right for your financial position, and in this case the key might be finding balance between a high rate and flexible terms. There’s always a trade-off: the longer the commitment, the less flexibility, the higher the rate. If you want to know how to find high interest fixed annuities, be sure to read: finding the best fixed annuity.

Fixed Annuity Disadvantages

Fixed annuities have many retirement savings benefits, but do you know their disadvantages? There’s no such thing as a perfect investment, and annuities are no exception to the rule.

Before going any further, be sure to familiarize yourself with: fixed annuity disadvantages.

Fixed Annuity Pitfalls

No investment is right for everyone and annuity contracts are naunced. Fixed annuities are sound investments but as with any sale, you can get swindled. You’ll want to watch out for overly strict withdrawal schedules, hidden fees, and limited “guaranteed” rates. For a full list of potential gotchas, read: fixed annuity pitfalls.

Fixed Annuity Alternatives

A healthy retirement plan includes more than one investment vehicle. After all, diversification is the #1 rule of investing. Discover other types of investments that are more or less suitable for retirement savings. Explore CDs, mutual funds, bonds, treasuries, money market accounts, 401(k)s, and more. Compare fixed annuity features to those offered by variable and indexed annuities.

fixed annuity alternatives

Who Should Buy a Fixed Annuity?

Fixed annuities are ideal for retirees or those wary of market volatility. Although potential for windfalls is limited compared to variable annuities, the fixed annuity’s guaranteed rate-of-return beats many other investment vehicles. Fixed rate annuities are well suited for conservative of investors or retirees who need steady monthly income. See which annuity is rightfor me for an overview of all your annuity options.