In this guide, we’ll tell you everything you need to know about fixed annuities – how they work, how they’re customized, and how to evaluate whether using them to grow your retirement savings makes sense for you.
For detailed examples of how fixed annuities work or to have a copy of this guide to read at your leisure, download the free Fixed Annuity Guide PDF.
What Is a Fixed Annuity?
A fixed annuity is a tax-deferred retirement savings vehicle that provides fixed asset accumulation, much like a CD. With a fixed annuity, you can invest your savings over a specified time horizon (typically 3 to 10 years), earning a fixed return. The interest earned in your fixed annuity is not taxed until withdrawn, and your principal is guaranteed.
Tip: You might hear this product referred to using a few different names:
Fixed deferred annuity (FDA)
Fixed rate annuity
Multi-year guaranteed annuity (MYGA)
Single premium deferred annuity (SPDA)
Because annuity terminology – and the fact that a fixed annuity is an annuity in the first place – is confusing, let’s break it down:
A fixed annuity is… an annuity.
An annuity is an insurance vehicle where a lump-sum amount is exchanged for a stream of payments going forward. What makes a fixed annuity an annuity is that it has the option to annuitize at the end of the contract term. You can also choose to leave your money invested at a renewable rate, withdraw all or a portion, or roll it over into a new fixed annuity. The distinction of being an annuity gives it tax-deferred status.
More specifically, a fixed annuity is… an accumulation annuity.
An accumulation annuity is bought for the growth potential of the money invested, and not as much for the ability to turn that money into income (as is the case with an income annuity). During the accumulation, or deferral, period your money will be invested with an insurance company and grow on a tax-deferred basis. You will have some access to your money – typically the interest or 10% of your balance – while it’s invested. Accumulation annuities grow either at a fixed rate (like fixed annuities) or grow based on market performance (as with variable and indexed annuities).
And finally, a fixed annuity is… a multi-year guaranteed accumulation annuity.
Fixed annuities earn a fixed rate over a multi-year time horizon. The interest rate will be specified upfront and will vary based on the amount you’re investing, your investment horizon, the credit rating of the insurer, and market conditions at the time of purchase. At the end of the guarantee period, the rate may change.
In summary, a fixed annuity is an annuity that operates much like a CD, offering low-risk tax-deferred accumulation at a fixed rate.
Fixed Annuity FAQs
Retirement Income & Annuities
What is an annuity?
An annuity is a form of insurance that protects your longevity. When you purchase an annuity you pay an insurance company, who invests your money, and promises to pay you a fixed and guaranteed amount of income starting on a future predetermined date and continuing for the rest of your life.
What are the different types of annuities?
What makes an annuity an annuity is its ability to provide guaranteed, lifelong income in retirement. Some annuities exist to do only that, while others have that as just an option. The former (provides income and income only) is called an income annuity. There are three types of income annuities:
Immediate annuity (provides guaranteed, lifelong income starting 1-12 months after purchase)
Longevity annuity (provides guaranteed, lifelong income starting 2-40 years after purchase)
Qualified Longevity Annuity Contract or QLAC (a longevity annuity purchased with IRA funds starting after age 72)
The other type (has the option but not requirement) to provide income is known as a deferred annuity. There are three types of deferred annuities:
Fixed annuity or multi-year guaranteed annuity (like a CD, it provides a guaranteed rate of return for a fixed number of years)
Fixed indexed annuity (investment product that tracks market indices with limits on how much you can gain/lose)
Variable annuity (investment product using mutual funds with limits on how much you can gain/lose)
Blueprint Income offers all types of income annuities, as well as fixed annuities. The Personal Pension is our flagship product that gives you access to all four with subscription-like funding.
What is a fixed annuity?
A fixed annuity, also known as a multi-year guaranteed annuity (MYGA), provides a guaranteed rate of return for a predetermined period of time. It is most similar to a Certificate of Deposit (CD) that is offered by a bank or other-FDIC insured institution, except that it is offered by an insurance company. When compared to CDs, fixed annuities offer higher guaranteed crediting rates over longer time horizons (2-10 years), tax-deferred growth, the ability to annuitize upon maturity, and liquidity via penalty-free partial withdrawals for those 59½ or over.
Fixed Annuities vs. CDs
Fixed annuities operate very similarly to CDs. Both vehicles offer a safe way to save money, crediting higher interest rates than available through savings accounts by requiring you to lock your money away for a period of time. However, fixed annuities have longer-term investment horizons and tax-preferential treatment, making them a better choice for retirement savings. As CDs are the more well known of the two products, it can be easier to understand fixed annuities using a side-by-side comparison:
$2,500 – $1,000,000
Virtually any denomination
3 years – 10 years
3 months – 5 years
Vary by term and size but typically higher than CD rates
Vary by term and size but typically lower than fixed annuity rates
Taxes on interest gains deferred until money is withdrawn
Interest taxable annually as earned
Typically, a portion of the account balance is available for withdrawal annually
Generally no (free) access to account balance is available
Can generally withdraw accumulated interest or 10-15% of cash value for free if aged-59½ or older
All withdrawals are charged, typically equal to a portion of the interest you’ve earned
Backed primarily by the issuing insurance company, and additionally by State Guaranty Funds
CDs are insured by the FDIC (up to $250,000 total per bank)
Asset passed directly to beneficiary without going through probate process
Probate process required to pass asset to heirs
Does not cover all products or all companies. Specific information available by product upon request. Updated as of November 18, 2018.
Another key difference is that fixed annuities can be annuitized at the end of the contract term. Annuitization is the process of turning a lump-sum of savings into a stream of steady income, guaranteed to last a number of years or for life. This feature is what makes annuities good for retirement income and qualifies them for tax-preferential treatment.
Who Is a Fixed Annuity Right for?
Just like with any product, fixed annuities might make sense for you, or they might not. We’ve compiled a checklist to help you figure out whether a fixed annuity fits your investment needs.
Consider buying a fixed annuity if…
You have money to invest for at least 3 years but want access to it within 10 years
The money you’re investing is earmarked for retirement or to be passed on to heirs
You’ve already maxed out your IRA or 401(k) contributions
You want greater certainty and principal protection
You have other assets in the market exposed to higher expected returns
You want to preserve some liquidity
A fixed annuity is probably not the right product for you if…
You need to access your money within 3 years or before age 59½
You aren’t maxing out IRA or 401(k) contributions
You’re interested in high risk investments and willing to risk principal to achieve it
You’re interested in generating income in retirement
Fixed Annuity Pros & Cons
Fixed annuities are a useful tool for retirement savings. They provide a safe, tax-advantaged way to earn a good return on savings needed in the near future. They are very similar to CDs, with added benefits:
Guaranteed, Strong Return
The money you invest in a fixed annuity will accumulate at a fixed rate, which is specified upfront and guaranteed for the entire contract. Fixed annuities generally offer higher rates than CDs with the same contract length.
From the government’s perspective, an annuity is a retirement savings vehicle. As such, it receives similar tax treatment as IRAs: no taxes are paid until distributions are made. For a fixed annuity, this means that interest will accumulate and compound without incurring annual taxes, as is the case for a CD.
Unlike with most other investments, there is no market risk associated with a fixed annuity. Your principal is protected and guaranteed to accumulate at a fixed rate, making fixed annuities a good place to park retirement money you don’t want to risk losing.
Fixed annuities provide some liquidity, typically making interest earned or 10-15% of the contract’s cash value available penalty-free annually if you’re over 59½.
Simple & Easy to Understand
There are a lot of complex products, but a fixed annuity is one of the simple ones. Assuming you leave your money in the fixed annuity until maturity, all you need to know is (1) how long until your money is available and (2) what your return will be over that period of time. There are no hidden fees that you need to worry about.
Despite these benefits, fixed annuities are not good for everyone or for all situations. Here are some of the drawbacks:
Penalties for Withdrawals Under Age 59½
Fixed annuities are really meant to be used for retirement savings. The IRS issues a 10% penalty on gains withdrawn from a fixed annuity for account holders under age 59½ .
Not for Generating Income
While the fixed annuity has a lot of great benefits, it’s not the most effective way to generate income in retirement. Instead, fixed annuities are typically used for accumulation. There are other products that are better for converting assets into income, like income annuities.
Fixed Annuity Rates
Fixed annuity interest rates will vary over time as market conditions change, being driven most notably by longer-term Treasury and investment grade corporate bond yields. In addition, the size of your investment, length of time you’re willing to lock away your money, and the credit rating of the carrier will impact the rate. As of November 2018, the top fixed annuity rates available by term are:
To see the current fixed annuity rates and the insurers behind them, visit the Fixed Annuity Marketplace:
Understanding how the investment amount, investment term, and carrier’s credit rating drive interest rates will help you to select the fixed annuity that best suits your needs. Expect to have to think about the following:
Investment Amount: The higher the investment amount, the higher the rate. Larger fixed annuity investments will have access to higher interest rates. A portion of the insurance company’s expenses are fixed per contract such that incremental premium can essentially be invested without costing more. Said another way, there is a bonus for larger deposits.
Investment Term: The longer the contract term, the higher the rate. When an insurance company invests your funds, a longer time horizon gives them more flexibility for investing your money and weathering any market fluctuations. As is the case for bonds and other fixed income instruments, investors have the right to demand higher returns the longer their money is locked away. (Note that there may be some exceptions to this rule based on the availability of some intermediate terms, like 6, 8, and 9 years.)
Insurer’s Credit Rating: The higher the insurer’s credit rating, the lower the rate, but the safer the investment. Given that fixed annuities are not backed by the FDIC and instead by guaranty funds which vary by state, it’s an important factor to consider.
The Financial Value of a Fixed Annuity
A fixed annuity is a CD-like investment which credits a fixed interest rate over a specified period of time. On a pre-tax basis, the value of the fixed annuity is understood simply by its interest rate, or the rate at which you’ll earn a return. But, fixed annuities are even more valuable on an after-tax basis. Unlike CDs, interest earned on a fixed annuity is not taxed until money is withdrawn from the contract. This not only means lower taxable income for you during the accumulation period, but also additional compounded interest.
To illustrate the value of a fixed annuity, let’s take Kelli, a 55-year-old starting to prepare for retirement, as an example. Kelli has $800,000 of post-tax savings that she’s set aside for retirement. It’s currently invested in the stock market, but she’d like to move $100,000 to something safer. She’s considering a 5-year CD or fixed annuity.
During her search, Kelli finds a 5-year fixed annuity returning 4.00%, significantly more than the 3.37% her bank is offering for a 5-year CD. This chart compares the growth of the two products and illustrates the power of the fixed annuity’s tax-deferred growth.
The fixed annuity will produce an extra $4,000 pre-tax ($2,900 post-tax) over the 5-year period. Considering Kelli’s age, timeline, and her plans to use the money for retirement, the fixed annuity is the more sensible investment for her. Plus, if she decides to roll the money over into another annuity in 5 years, she’ll be able to extend the tax-deferral.
Fixed Annuity Taxation
In our discussion of fixed annuities thus far, we’ve assumed that the purchase was made with after-tax personal savings. However, it’s also possible to buy a fixed annuity with qualified funds, such as within an IRA. In this case, the fixed annuity doesn’t provide any additional tax benefits beyond what the IRA offers, which is tax-deferral of gains until money is withdrawn.
Continuing with the original assumption that the fixed annuity is being purchased with non-qualified funds, let’s dig deeper into the tax treatment at each phase of the contract:
There are no taxes due during the contract term. Your money isn’t subject to taxation while it’s growing. Not paying taxes means that you’re able to keep more money invested and earning interest. And, this benefit continues as long as you keep your money in the contract, which can be beyond maturity.
Instead, you pay taxes once money is withdrawn whether during, at the end of, or after maturity of the contract. Assuming the fixed annuity was purchased with after-tax savings, only the interest gain portion of your withdrawal will be taxable at ordinary income rates. (If your fixed annuity is held in an IRA, all withdrawals will be taxable.) Waiting until you’re in retirement, or in a lower tax bracket, to withdraw can reduce the taxes you owe. Note that you will incur penalties if you withdraw money before age 59½ or more than what’s allowed in your contract.
You can continue your tax-deferral by rolling over your fixed annuity into a new annuity. When your fixed annuity matures, you’re not obligated to withdraw your funds. You can choose to roll it over into another fixed annuity or a different type of annuity through a tax-free 1035 exchange.
Tax treatment of these payments can be tricky, so be sure to reach out to a tax advisor for a complete explanation.
Fixed Annuity Portfolio Strategies
Investment decisions should not be made individually or in isolation. Instead, consider your entire financial portfolio and situation when investing. Here are some ways to think about a fixed annuity fitting into your portfolio strategy.
When diversifying your retirement portfolio, you will likely select a combination of equities and bonds that’s appropriate for both your risk-appetite and your age/investment horizon. As a fixed income investment, fixed annuities have a place in any well-diversified portfolio. Consider your fixed annuity purchase as portion of your assets you’d otherwise have allocated to bonds.
Back to our example: 55-year-old Kelli’s $800,000 in savings are currently invested at a 70/30 mix of stocks and bonds. She wants to maintain her equity exposure and overall investment mix when she purchases a $100,000 5-year fixed annuity.
How does she do it? At a 70/30 mix, Kelli had $560,000 (70%) invested in equities and $240,000 (30%) invested in bonds. After transferring $100,000 to a fixed annuity, Kelli will have to rebalance the remaining $700,000 to an 80/20 mix. Doing so maintains her $560,000 exposure to equities and decreases her investment in bonds to $140,000. Once adding back in the $100,000 fixed annuity, which acts as a fixed income investment, Kelli has maintained her desired 70/30 portfolio diversification.
Breaking up your purchase into multiple fixed annuities with different contract terms is a useful strategy in a low interest rate environment. A fixed annuity laddering strategy accomplishes two things: you’re able to secure a higher interest rate today that’s only available for longer time commitments while also creating multiple opportunities to reinvest at potentially higher future rates. For example, instead of buying one 5-year fixed annuity, you could buy 3 fixed annuities with maturities of 3-years, 5-years, and 7-years. The money locked in for longer will be eligible for higher rates today. And, you’ll have liquidity available at multiple dates in the future, which makes it more likely that you’ll catch rising rates.
If Kelli employs this strategy, she’ll split her $100,000 purchase into multiple smaller purchases, keeping the average investment term close to 5 years. Based on current rates and her personal circumstances, Kelli decides to split her investment evenly between 3-year, 5-year, and 7-year fixed annuities, crediting 3.10%, 4.00%, and 4.10% respectively. This way, she’ll have funds maturing in 3 different years, giving her more reinvestment opportunities.
Fixed Annuity + Annuitization vs. Longevity Annuity
With your fixed annuity, you have several options upon maturity. If you are planning to annuitize your fixed annuity, you may be better off purchasing a longevity annuity today. The money you invest in a longevity annuity will produce a guaranteed lifetime income stream starting at some point in the future, resembling what your annuitized fixed annuity will look like.
Whereas the fixed annuity will become liquid at the end of the contract term, the longevity annuity is locked-in, and its value can only be accessed through income payments. A fixed annuity plus annuitization strategy has more liquidity and optionality, but a longevity annuity will offer higher income payments.
The two strategies are summarized in the table below.
Fixed Annuity + Annuitization
Money is invested in a fixed annuity
Money is invested in a longevity annuity.
Account accumulates with interest. Some liquidity is available.
Insurance company invests your money, but its growth is invisible and illiquid.
Money is as available. Annuitization elected, effectively purchasing an immediate annuity.
Income payments begin immediately and continue for life.
Income payments begin at the end of the deferral period and continue for life.
Fixed Annuity Terminology & Options
Fixed annuities are relatively simple investments, but there’s still some terminology, features, and options that you’ll need to understand. We’ve outlined some key concepts for you here.
When you buy a fixed annuity, you are locking in a return that’s guaranteed for the contract term. The fixed annuity could be structured to offer the same crediting rate every year or a different rate in the first year, which is higher than in subsequent years. Ultimately, and assuming you won’t be cashing out early, what matters is the yield to maturity/surrender, or the annual effective return you’re earning over the full locked-in period. Finally, at the end of the contract, you’ll have the option for continue the fixed annuity with an annually renewable rate. Here’s how the rates will be identified:
Base Rate: annual interest rate credited to your account during the contract term
Additional First Year Interest Rate Bonus: additional interest rate that might be added to the base rate in the first year
Yield To Surrender/Maturity: the effective annual interest rate when spreading the bonus rate evenly over every year
Renewal Rate: after the contract term ends, your money will continue to earn interest at the prevailing renewal rate, which moves according to market conditions
Guaranteed Minimum Renewal Rate: the lowest renewal rate possible (floor)
Surrender/Contract/Guarantee Period & Rates
The contract term for a fixed annuity is actually the period during which surrender charges apply. During these years, if you withdraw more than what’s allowed – typically 10% of your account value – fees will be assessed. Most fixed annuities have pre-set declining surrender charge schedule which can start as high as 10% in the first year and will then decline by typically 1% per year. Here’s how the surrender charge period will be identified:
Surrender Charge Period: years during which you’ll be charged to access anything greater than the free withdrawal
Surrender Charges: Rates applied to amount surrendered above free allowance for each year of the surrender charge period
Note that typically the surrender charge period will be the same as the rate guarantee period, but products are occasionally structured to have a longer surrender charge period. In this case, the guaranteed rate will be in effect for only a few years, after which you’ll earn the renewal rate until the surrender charge period ends. This option could make sense if you expect interest rates to increase, but it’s generally not something we’d recommend.
Fixed annuities typically allow you to access a portion of your money penalty-free. The allowance will differ from carrier to carrier, but it’s often cumulative interest or 10% of the account balance. You should only plan to take advantage of these withdrawals if you’re at least 59½, as the IRS imposes a 10% penalty on withdrawals made before you reach that age.
Note that if your fixed annuity is qualified and was purchased within a 401(k) or IRA, any applicable required minimum distributions will be withdrawable penalty-free.
Market Value Adjustment vs. Book Value
There are two types of fixed annuities: those with a market value adjustment (MVA) or without, known as book value (BV). The MVA or BV classifications only impact you if you decide to withdraw funds early. In the case of a book value fixed annuity, the amount you’re able to withdraw will simply be the account value less surrender charges described above. However, a fixed annuity with a market value adjustment could reduce the amount you’re able to access upon surrender.
The market value adjustment will, as the name suggests, adjust the amount you’re able to surrender based on market conditions at that time. If interest rates have gone up since purchase, an additional fee will be assessed that lowers the withdrawal value. The reverse is also true. If interest rates have gone down since purchase, the amount you’re able to withdraw will actually increase.
While seemingly bizarre, fixed annuities with MVAs are actually very common and well-liked, offering higher interest rates than their BV counterparts. The market value adjustment protects the insurance company from adverse behavior by charging you for surrendering in a rising rate environment. That’s because the insurance company would otherwise lose money liquidating assets to fund your surrender (bond prices go down when interest rates go up). Having this downside protection means they can offer you a higher rate.
Fixed Annuity Online Buying Tips
It’s now possible to make your fixed annuity purchase online. Instead of in-person meetings and paper applications, we’ve built the technology to provide you real-time fixed annuity rates online and generate your application for the insurer digitally. Despite our tech-enabled approach, we’re still fiduciaries, licensed to provide these products to you, and available via chat, email, or phone to provide personalized assistance.
Here is the process to secure your fixed annuity online:
Check rates using the free Fixed Annuity Marketplace, being sure to filter them by your state and the amount you want to invest.
Review the details of the annuities and your rates.
Once you’re ready, click “Apply” on any new quote or locked quotes in your account.
Fill out the online application in under 10 minutes.
Our team will follow up to confirm your purchase and submit the application to the insurer(s) on your behalf.
Buying a fixed annuity is easier when you’re equipped with the right information. In addition to being available to help walk you through the process, Blueprint Income has compiled a list of things to keep in mind:
Where to Buy a Fixed Annuity
Fixed annuities are sold via insurance agents, brokers, and financial advisors. It’s also possible to shop online for a fixed annuity via our website. Our Fixed Annuity Marketplace allows you to easily compare fixed annuities side-by-side and filter them for the specifications that meet your needs.
Focus on Interest Rate & Credit Rating
Fixed annuities are largely uniform from carrier to carrier, meaning you can make your decision based on just two things: the interest rate being offered and the insurer’s credit rating. An insurer’s credit rating, similar to a bond’s rating measures their financial strength and ability to meet future obligations. Like bonds, the higher the credit rating, the lower the rate. Buy the product that offers the best rate at the rating that’s right for you.
Consider Your Agent/Broker’s Incentives
The Department of Labor worked for nearly a decade to reform the requirements for giving financial retirement advice. The goal was to ensure that advisors, agents, and brokers put their clients’ best interests before their own. The reforms were not implemented, so you should be extra cognizant when considering an annuity purchase to understand your agent or broker’s incentives. How are they compensated on the sale? How do they select the products they’re showing you? Do they work with only one or a handful of insurance companies?
Just like with CDs, you can use a laddering strategy by buying multiple fixed annuities with staggered terms, i.e. 3-, 4-, 5- and 6-year terms. Because they come due at different dates, the hope is that you’ll be able to take advantage of an upswing in interest rates.
Download the Fixed Annuity Guide
We’ve given you a lot to read! It might be easier to download the PDF version, print it out, and read it at your leisure. If this interests you, simply click the button to access the free guide.
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