Fixed Income Annuities: A Complete Guide

A fixed-rate annuity is a type of retirement savings product that grows steadily and safely, providing you with a guaranteed* growth rate and the opportunity to convert your account to a lifetime income stream in the future. For those looking to balance growth with stability, fixed annuities can play a meaningful role in creating a more predictable financial future.

Annuity basics

An annuity is an insurance product that allows you to build tax-deferred assets for retirement or convert some of your retirement savings into a stream of guaranteed income payments that last for life. With the right annuity as part of your retirement strategy, you can remove the risk of outliving your savings. In other words, annuities are designed to turn savings into income you can rely on, something traditional investment accounts don’t always guarantee on their own.

Related: Guide to annuities

What is a fixed-rate annuity? 

There are two main ways to grow your retirement savings with an annuity. A variable annuity invests your contributions in the market and has the potential for higher returns, but at a greater risk. A fixed annuity is safer, growing at a steady rate that is set when you purchase it. This makes fixed annuities especially appealing for individuals who prioritize stability over market-driven growth.

Immediate vs. deferred fixed annuities

You can choose to start receiving payments now if you fund your annuity with a lump sum, typically by transferring funds from a 401(k) or other retirement savings. An immediate annuity (also called a lifetime income annuity) is a good way to turn some of your savings into guaranteed payments for life.

If you’re not yet ready for retirement, you can plan for the future and fund a deferred annuity with a lump sum or periodic premium payments. It will continue to grow steadily at your fixed interest rate until you’re ready to access it later in life. Choosing between the two often comes down to timing and whether you need income now or want to continue building toward it.

What happens to an annuity when you die?

Annuities can be structured in many ways to fit you and your family’s specific needs. With some, payments simply end when the annuitant (owner) dies. Others will continue to pay a spouse or beneficiary for years afterward. At New York Life, annuities can be set up to provide death benefits that pay out the part of the lump sum that has not yet been distributed to a beneficiary when you pass. Customizing your fixed-rate annuity to meet your needs is an important aspect of planning for retirement. These options allow you to align your annuity not just with your lifetime income needs, but also with your broader legacy goals.

What is an equity-indexed annuity?

An equity-indexed annuity grows at a pre-determined interest rate, rather than with investments, but that interest rate is partially tied to a stock index, like the S&P 500 Index. Since there is a minimum guaranteed interest rate with these annuities, there is no risk of losing money. Equity-indexed annuities are newer than the other types, and they are often difficult to compare apples to apples because each company—and sometimes each product—will use a different calculation to decide how the interest rate is tied to the markets. Keep in mind that with equity-indexed annuities you are forgoing the higher return potential of a variable annuity and they typically have high surrender charges. You should discuss what is right for your situation with your agent or financial professional. They can offer a middle ground between fixed and variable annuities, but the added complexity makes it important to fully understand how returns are calculated.

Pros and cons of fixed-rate annuities

Fixed-rate annuities offer a balance of stability and predictability, but they are not without tradeoffs. Understanding both the benefits and the limitations can help you decide how they fit into your overall retirement plan. While they can provide dependable income and protect against market loss, they may limit flexibility and growth potential compared to other options.

Payments for life

One of the more common types of annuities is a lifetime income annuity; with such an annuity, you are purchasing financial security. In exchange for a lump-sum payment or a series of premium payments, you will receive periodic income (usually monthly) for the rest of your life. 

The amount you receive with each installment will depend on how much you’ve contributed into the annuity, but you can get back more than you purchased. The longer you live, the more total income you’ll get, and it will never run out. One thing to keep in mind is that withdrawals from a fixed annuity over an allowed limit may be subject to a surrender charge for a certain period of time. Once the surrender charge period has ended, however, you will have full access to your money. Typically, the surrender charge decreases over a number of years. 

No-risk growth

There are several factors that will affect the interest rate of your annuity, but you can expect average annuity rates between 2.15% to 3.25%** depending on the annuity type. Whatever funds you contribute will grow by that rate every year, without fail, so there’s no risk of loss, as there would be with stocks or mutual funds. 

Companies will offer different rates, so shop around. But it’s important to understand that the annuity with the best rate will not always be the best product. Be sure to weigh other factors, like the financial stability of the company, any fees you may be charged, and potential benefits you can add on to your annuity. An agent can help you understand your options and set expectations. 

Predictable income planning

Fixed annuities make it easier to plan your retirement income because you know exactly how much you’ll receive and when. This predictability can help you cover essential expenses like housing, food, and healthcare without relying on market performance. For many, this creates a stronger sense of financial confidence in retirement.

Limited liquidity

One of the main drawbacks of fixed annuities is that your money may be less accessible, especially during the surrender charge period. While you can typically withdraw a portion each year, exceeding those limits can result in penalties. This makes it important to keep separate savings for emergencies and short-term needs.

Lower growth potential

Because fixed annuities prioritize stability, they typically offer lower returns than market-based investments over time. This means they may not keep pace with inflation or maximize long-term growth. As a result, they are often best used alongside other investments rather than as a standalone strategy.

How do fixed annuities work?

Fixed annuities operate in two main stages: a period of growth followed by a period of income. During the growth phase, your contributions earn a guaranteed interest rate. Later, you can convert those savings into a predictable income stream based on your needs and preferences.

Accumulation phase

In the accumulation phase, your money grows at a fixed interest rate over time. You can contribute either a lump sum or a series of payments, depending on the product. Because the rate is guaranteed, your balance increases steadily without exposure to market volatility.

Payout phase

When you’re ready, you can begin the payout phase, where your annuity is converted into income payments. These payments can last for a set number of years or for the rest of your life. The structure you choose will determine how much you receive and whether any benefits continue to a beneficiary.

Is a fixed annuity right for me?

Depending on your goals, an annuity can be an important piece of your retirement strategy, but whatever your situation, it probably shouldn’t be your only retirement savings vehicle. A balanced and diversified portfolio is likely the most consistent way to give yourself a fulfilling retirement. As you consider your options, here are a few things to keep in mind.

401(k) and IRAs

Many financial professionals will recommend taking advantage of these common tax-deferred retirement savings vehicles if they are available for you. However, each has a cap on how much you can contribute each year, and the savings aren’t guaranteed to last for your entire lifetime.

Certificates of deposit (CDs)

A CD is another low-risk savings option similar to a fixed-deferred annuity. They are offered by banks and credit unions and work like this: You deposit a lump sum of money for a predetermined period of time—called a term—which is often three months to a year. You can’t use the money during this time. Then, when the term is up, you get the money back, plus interest at the agreed-upon rate. If you can afford to live off just that interest, you can reinvest your principal back into a CD and continue the cycle.

Example scenario: Balancing your portfolio

You are in the prime of your career and have been able to save a decent amount. Most of it is invested in an aggressive stock approach to maximize growth potential. You believe it will pay off and provide you with a good retirement, but there is still some risk. Purchasing a fixed deferred annuity can help you balance the risk with dependable savings you know will always be there. 

Example scenario: Securing peace of mind

You’ve just retired. You have a good amount of savings in a 401(k), but you are uncertain how much you should spend every month and how long it will last. You can transfer some or all of those savings into an immediate annuity, which will guarantee you a steady and predictable monthly income you can count on for life.

Both fixed deferred and immediate annuities can help reduce the risk of outliving your retirement savings. They can provide valuable peace of mind and protect against longevity concerns. Go through your retirement checklist with one of our financial professionals to see if a fixed deferred or immediate annuity would be a good addition to your portfolio.

Related: Connect with an agent

Fixed Annuity FAQs

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*Guarantees are based on the claims-paying ability of the issuer.

** https://www.annuityexpertadvice.com/fixed-annuity-rates/#average-fixed-annuity-rates

Annuities contain certain fees, risks, limitations and restrictions; Please speak with a financial professional for costs and complete details. Withdrawals may be subject to ordinary income taxes and, if made prior to age 59½, may be subject to a 10% IRS penalty. Surrender charges may also apply.

Please consider the charges, risks, expenses, and investment objectives carefully before purchasing a variable annuity. The prospectus contains this and other information and can be obtained from a financial professional. Read the prospectuses carefully before you invest or send money.

Annuity products are issued by New York Life Insurance and Annuity Corporation and its parent company, New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010. All guarantees are dependent on the claims-paying ability of the issuer. Available in jurisdictions where approved.

Variable annuities are offered by NYLIFE Securities LLC, Member FINRA/SIPC, a licensed insurance agency and New York Life company.

Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professionals before making any decisions.

Sources:

1. Definition of annuities and how they work

https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities

2. SEC overview of annuities, including variable vs. fixed distinctions and risks

https://www.sec.gov/

3. Balanced explanation of annuity types, benefits, fees, and considerations

https://www.finra.org/investors#/

4. Tax treatment, penalties, and rules around annuities

https://www.irs.gov/retirement-plans

5. Supports longevity risk and lifetime income framing in retirement planning

https://www.ssa.gov/planners/retire/agereduction.html

6. Fixed annuity interest rate range

https://www.annuityexpertadvice.com/fixed-annuity-rates/#average-fixed-annuity-rates

7. Explanation of fixed annuities, accumulation vs. payout phases, and pros/cons

https://www.investopedia.com/terms/f/fixedannuity.asp

8.  Deferred annuity structure and growth phase)

https://www.investopedia.com/terms/d/deferredannuity.asp