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How Much Interest Can a Fixed Index Annuity Really Earn?

Nov 28, 2023

Blueprint Income Team

The amount of interest an annuity earns affects how much money you accumulate to convert into income during annuitization. For a fixed index annuity, there are multiple factors that can influence its growth.

What are fixed index annuities?

Fixed-index annuities are a type of insurance product whose credited interest is linked to the performance of a market index, such as the S&P 500. When the underlying index performs well, fixed-index annuities may be credited with more interest than a traditional fixed annuity that earns a stated interest rate. However, purchasing a fixed-index annuity is not a direct investment in the stock market, so your principal remains protected. Fixed index annuities offer a balance between safety and potential growth, making them an attractive option for people who want a conservative retirement vehicle that offers the potential for higher returns.

How much is the average return on a fixed index annuity?

Your actual returns can vary significantly depending on a variety of factors, such as:

Market conditions

Because the interest credited on a fixed index annuity depends in part on how well the underlying index performs, the ups and downs of the market affect the rate at which your annuity grows. Crediting periods marked by strong market conditions yield greater growth, whereas poor market conditions yield no growth. With fixed index annuities, your principal remains protected, so you will never experience negative returns.

Participation rates

The participation rate is the percentage of the index's return that gets credited to the annuity. Imagine, for example, that you have a fixed index annuity with a 50% participation rate. In a crediting period when the index returns 10%, the annuity would be credited with 5%, or 50% of the 10% gain.

A higher participation rate may allow the annuity holder to benefit more from the index's growth, but the gains may be limited by a cap rate or spread. For instance, suppose a fixed index annuity has a participation rate of 80% and a cap rate of 6%. In the event of a 10% index return, the participation rate would allow for an 8% credit to the annuity, but the cap rate would reduce it to 6%.

Cap rates

A cap rate is the maximum interest a fixed index annuity can earn in a particular crediting period. For example, if the cap is 6%, the index returns 8%, and the participation rate is 100%, the annuity will be credited only 6%, as the cap limits the credited interest. However, if the participation rate is lower, the credited interest may be further reduced. Caps can vary depending on the insurance company from which you purchase your annuity, the specific fixed index annuity you buy, and even a given crediting period. A higher cap allows for more significant growth potential, but it may be accompanied by a lower participation rate or a higher spread.


The spread, also known as the margin, is a percentage subtracted from the index's return before applying the participation rate. For example, if the margin is 2% and the index returns 10%, the annuity will be credited with 8% (10% minus 2%).

The impact of the spread can be significant on the annuity's returns, especially in years with lower index returns. For instance, if a fixed index annuity has a 2% spread and a 70% participation rate, and the index returns 8%, the annuity will be credited 4.2% (8% minus 2% and then multiplied by 70%). In this case, the spread reduces the credited return by 1.8% (6% minus 4.2%).

How do you calculate the rate of return for an annuity?

There are two rates of return for an annuity. They are:

Total rate of return

The total rate of return for an annuity is the cumulative return for the entire life span of the annuity, expressed as a percentage. It can be calculated by following these steps:

  1. Subtract the amount of your initial contribution from the current account value. For example, if your contribution was $300,000 and the annuity currently has $500,000 credited to it, the equation would be $500,000 minus $300,000, resulting in a difference of $200,000.
  2. Divide the difference by the amount of your initial contribution. In this case, the equation would be $200,000 divided by $300,000, resulting in a quotient of 0.67.
  3. Convert the quotient to a percentage value, which in this case is 67%. That would be your total rate of return.

Compound annual growth rate

The compound annual growth rate (CAGR) indicates the average annual rate of return for your annuity. It can be calculated using the following formula:

CAGR = [(ending value / initial contribution)^(1 / number of years)] - 1

Imagine that you initially contributed $400,000 and the annuity grew to $500,000 over four years. The steps to calculating the CAGR would be as follows:

  1. Divide $500,000 by $400,000 for a quotient of 1.25.
  2. Divide 1 by the number of years, resulting in a quotient of 0.25.
  3. Raise the first quotient to the power of the second quotient (1.25 to the power of 0.25), which is 1.05737126344.
  4. Subtract 1 from the power, resulting in 0.05737126344.
  5. Convert the difference to a percentage, which would be 5.7%.

Example case studies

Here are some case studies to better help you understand how much interest a fixed index annuity can earn depending on market conditions and specific contract features, such as cap rates, spreads, and participation rates:

Case study 1: Fred's fixed index annuity with a 6% cap

Fred contributes $100,000 to a fixed index annuity with a cap rate of 6%, a 100% participation rate, and no spread. If the market index returns 8%, the annuity will be credited 6%, as the cap limits the credited interest. In this scenario, Fred's account value will grow to $106,000 ($100,000 times 1.06).

However, if the market index had returned 2%, his account value would have grown to $101,020 ($100,000 x 1.02) during this crediting period.

Case study 2: Mary's fixed index annuity with a 2% margin and 70% participation rate

Mary contributes $100,000 to a fixed index annuity with a 2% spread and a 70% participation rate. There is no cap rate in her contract. If the market index returns 10%, the annuity will be credited 5.6% (10% minus the spread, with the difference multiplied by 70%), and Mary's account value will grow to $105,600 ($100,000 times 1.056). However, if the market index were to have returned 4%, the annuity would have been credited 1.4% (4% minus the spread, and then multiplied by 70%) for an account value of $101,400 ($100,000 times 1.014).

What other factors affect annuity returns?

Aside from market conditions and pricing levers, the returns you realize on your fixed index annuity depend on factors that relate to other annuity types. These factors are:

Interest rates

Interest rates play a significant role in determining the cap levels of your fixed index annuity. Higher interest rates generally result in higher rate caps and thus the opportunity for better crediting rates. Conversely, low interest rates can result in lower cap rates and thus more conservative growth potential for fixed index annuities.


The principal, or the initial contribution, is another factor affecting annuity returns. A higher principal amount allows for more growth over time, while a smaller contribution may limit the overall growth of the annuity. However, the growth potential is the same regardless of the amount of your principal.

Annuity fees and charges

Fees associated with annuities, such as contract fees, management fees, and surrender charges, can also impact the returns. Higher fees can erode the overall performance of the annuity, while lower fees allow for more significant growth potential.


Some annuity contracts offer custom features called riders, which can provide additional benefits or guarantees, such as guaranteed lifetime income, enhanced death benefits, or long-term care coverage. While these riders can offer valuable protection, they often come with additional costs that can reduce the overall return on the annuity.

What are the risks and rewards of fixed index annuities?

Fixed index annuities offer a balance of safety and growth potential. The principal protection provides a safety net for conservative investors, ensuring safeguards against market downsides. At the same time, the potential for higher returns linked to a market index offers the opportunity for growth, albeit with some limitations imposed by caps, participation rates, and spreads.

The risks associated with fixed index annuities include the possibility of earning lower returns compared to other investments because of the aforementioned limitations. Additionally, fixed index annuities are moderately illiquid, with surrender charges applicable if you decide to withdraw funds in the contract's early years. The creditworthiness of the insurance company issuing the annuity is another factor to consider, as the guarantees provided by the annuity are backed by the financial strength of the insurer.

Does a fixed index annuity fit your retirement plan?

A fixed index annuity may be a suitable addition to a retirement plan for those seeking a balance between safety and growth potential. It can provide a guaranteed income stream, principal protection, and the potential for higher returns partially tied to market performance. However, it is crucial to carefully consider the specific contract features and fees, as well as the insurance company's financial strength, before you purchase a fixed index annuity.

Before making any investment decisions, it is advisable to consult with a financial professional who can help assess your individual needs, risk tolerance, and overall financial goals. By doing so, you can determine whether a fixed index annuity, or another annuity product, is suitable for you. A good place to start is talking to the annuity consultants at Blueprint Income. Feel free to get in touch by calling 888-867-7620 or emailing support@blueprintincome.com to learn more about annuities.


Blueprint Income Team

We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.