How Do Fixed Annuities Work?

Christian Worstell
In this article...
  • Learn how fixed annuities work, including pros like tax-deferred returns with guaranteed rates of interest and cons like generally lower yields.

Fixed annuities offer tax-deferred investment options with guaranteed rates of interest, providing financial security as part of a retirement planning strategy. But deciding which fixed annuity is best for you can be a difficult task.

In this review, we'll take an in-depth look at fixed annuities. We'll explore how fixed rate annuities works and the pros and cons associated with them. We'll also detail how a fixed interest rate annuity rate of return is calculated and compare it to variable or indexed annuities.

Table of Contents:

What Is a Fixed Annuity?

A fixed annuity is an investment contract between you and an insurance company. A guaranteed rate of return is promised on your funds, with payout options including a single lump sum or installments spread out over an extended period. The amount of the payout depends on how much you invest and for how long.

You can typically purchase an annuity from an issuing insurance company, who then guarantee the original investment plus any interest earned during the term length of the annuity.

The key advantage of this type of investment is that a fixed annuity guarantees an investor with protection against market fluctuations, as the returns are not dependent on stock performance or other macroeconomic conditions.

Additionally, certain kinds of fixed annuities provide tax-deferred growth prospects. This allows investors to accumulate wealth without having to pay taxes until withdrawals are made on qualified annuities, usually when they reach retirement age. With this kind of financial security at your fingertips, you can rest easy knowing that you’re taking steps towards achieving long-term financial success.

For those aiming for a reliable source of income in retirement, fixed annuity contracts can be tailored to suit their individual needs. Types of fixed annuities vary, so let's take a closer look at the different options available and the fixed interest rate they offer.

Key Takeaway: Annuities with a fixed interest rate can be a viable choice for those seeking to ensure a fixed rate of return on their original investment. These insurance contracts provide tax-deferred growth potential, allowing savers to build up their nest egg without having the worry about paying taxes until they begin withdrawing from it.

Types of Fixed Annuities

Fixed annuities are a type of insurance product that can provide income during retirement. Insurance companies may offer different types of fixed annuity guarantees and payout options, including immediate, deferred, and single premium.

  • Immediate Annuities are purchased with a lump sum payment and then pay out an income stream for the rest of your life or for a set period of time at a guaranteed interest rate. This is often used to supplement Social Security benefits or other sources of retirement income.

    The rate of return on an immediate annuity depends on the amount invested, your age at purchase and current interest rates.

  • Deferred Annuities are investments that allow you to save money over time and receive periodic payments when you reach retirement age. These payments can be structured as either fixed amounts or variable amounts based on market performance.

    Deferred annuities also have tax-deferred growth potential, so any earnings accumulate without being taxed until withdrawn from the account at retirement age. This makes it a popular component of some retirement plans.

  • Single Premium Annuities are similar to a deferred annuity but require only one initial payment instead of multiple contributions over time. Single premium annuities can be more flexible than other types of fixed annuity insurance contracts, yet often come with a heftier fee due to the absence of regular payments.

Overall, fixed annuities can provide financial security during retirement. As a financial product, they offer guaranteed returns while providing tax advantages through deferral periods. This makes them a great option for those nearing Medicare eligibility age or retired veterans looking for additional benefits options.

Younger investors may also want to consider investment options like annuities that allow you to earn interest over a guaranteed period of an entire contract. Adding a financial product from an insurance company issuing a guaranteed interest rate on your initial investment over a fixed period.

Key Takeaway: Fixed annuities are an appealing selection for those seeking to support their retirement plans, supplying tax deferral benefits and assured profits. These insurance products come in several varieties, including immediate, deferred, and single premium – offering flexibility to suit individual needs depending on age or financial situation.

How Are Fixed Annuity Rates Calculated?

When calculating the rate of return on a fixed annuity, it is important to consider both the interest rate and fixed period of the contract. The interest rate determines how much money will be earned over time, while the length of time invested affects when those earnings can be accessed and what your payout options may include.

An investor buying multi-year guaranteed annuities like a five-year fixed annuity with an annual 4% interest rate would receive their initial amount plus the yearly 4% earnings for the duration of that period.

Compound interest is also an important factor when determining the potential growth of a fixed annuity. Compounding occurs when earnings are reinvested back into the account and earn additional returns based on current market conditions. This creates tax-deferred growth potential that could potentially result in higher yields and income payments than what was initially expected.

Investors should also consider any fees or expenses associated with investing in a fixed annuity before making their decision. These fees may include administrative fees or surrender charges which you'll likely face if you withdraw funds early from the issuing insurance company, before the fund reaches it's date of maturity.

Weighing the costs against potential rewards is essential to make an informed decision regarding whether this kind of product fits your financial goals.

Working out the yield of a fixed annuity necessitates familiarity with interest rates, compounding and associated expenses related to investing. Moving forward, it is important to compare fixed, variable and indexed annuities in order to make an informed decision when considering which type best suits your needs.

Comparing Fixed Annuities vs. Variable Annuities and Indexed Annuities

When it comes to annuities, there are three primary types: fixed, variable and indexed. Weighing the advantages and disadvantages of each annuity is essential prior to investing.

  • Fixed annuities supply a certain rate of yield throughout the term, with no vulnerability to market risk or instability.

  • Variable annuities offer greater potential returns but come with more risk due to their underlying investments in stocks and bonds.

  • Indexed annuities offer a combination of both fixed and variable components, allowing investors to take advantage of stock market gains while still providing some protection from losses if markets decline.

Fixed annuities are attractive because they guarantee an interest rate for the duration of the investment period. The insurance company guarantees your rate when you purchase your policy so you know exactly what you’ll earn each year on your initial investment.

Additionally, many fixed annuity contracts also include tax-deferred growth potential which can help maximize earnings over time as well as reduce taxes owed on withdrawals during retirement years. It is essential to be aware that the charges and costs related to investing in a fixed annuity can differ depending on provider, so it's prudent to investigate before deciding on one suitable for you.

For those seeking greater flexibility when managing their retirement portfolio and capitalizing on tax deferral benefits, a variable annuity could be the ideal choice.

This financial product offers access to various asset classes such as stocks, bonds, mutual funds and ETFs through separate accounts within the policy structure. This can provide diversification across multiple sectors for potentially higher returns than traditional savings vehicles like CDs or money markets account accounts. With its ability to tailor investments based upon individual goals, this option is definitely worth exploring.

Indexed Annuities provide a hybrid approach, combining elements of both fixed and variable features with additional options like bonus credits and income riders. Indexed annuities are popular amongst retirees who desire access to liquidity options \without sacrificing long-term growth opportunities. This type offers some level of protection from downside losses by capping how much principal can decrease if markets decline, and they still allow investors to participate in upside gains through predetermined caps set by insurers prior entering into agreement.

Anyone considering purchasing an annuity should understand all the risks involved and weigh them against projected rewards. It is critical to recognize that your

Key Takeaway: Fixed annuities offer a guaranteed rate of return with no market risk, while variable and indexed annuities offer the potential for higher returns with more risks. It's essential to investigate prior to investing in an annuity, since there are numerous choices with their own pros and cons contingent upon your personal retirement planning.

Fixed Annuity FAQs

What does Suze Orman say about fixed annuities?

Suze Orman believes that fixed annuities can be useful investment options for certain people, but they are not right for everyone. She advises caution when buying them, urging people to thoroughly investigate the potential risks and comprehend any applicable fees before making a decision.

Orman also suggests shopping around to find the best rates and terms available, as well as understanding how fees may affect your return on investment.

What does Dave Ramsey say about fixed income annuities?

Dave Ramsey recommends fixed income annuities as a way to generate retirement income. He believes that they provide the security of a guaranteed monthly payment, which can help protect against outliving your money in retirement.

Ramsey suggests considering them when other sources of retirement income may not be sufficient or reliable enough.

Are fixed annuities a good investment right now?

It depends on your individual financial goals and risk tolerance.

Fixed lifetime annuities may be a suitable option for those seeking to secure their principal from market fluctuations, as the interest rate is typically assured over the life of the agreement. Conversely, those looking to maximize growth potential may find other investments such as stocks or mutual funds more beneficial than fixed annuities due to their higher returns.

Before investing in an annuity, it is important to thoroughly consider all your available options.

What is a disadvantage of fixed annuities?

Fixed annuities generally provide lower yields than other investments, such as stocks and bonds.

Additionally, the money invested in a lifetime annuities cannot be accessed until retirement age or upon death, meaning that it may not provide sufficient funds for unexpected expenses. If the investor dies before reaching retirement age there may be significant surrender charges associated with withdrawing from the annuity early.


For those looking for a low-risk, guaranteed rate of return product, fixed annuities can be an ideal choice. Before settling on a choice, it is essential to comprehend the different kinds of fixed annuities accessible, how they determine their yields and examine them against variable and indexed annuity alternatives. Fixed annuities may not be suitable for everyone, but with careful consideration could provide valuable benefits when planning your financial future.

Take the time to learn about fixed annuities and government benefits programs now, so you can age with financial security and good health.

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at

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