Fixed annuity explained: how it works and who it fits

The short version

• A fixed annuity is a contract with an insurance company, not a bank account or a stock investment.
• Your money grows at a guaranteed rate set by the contract.
• Growth is tax deferred until you take money out.
• It can later be converted into a stream of income, sometimes for life.

A fixed annuity is an agreement between you and an insurer. You contribute money, either as a lump sum or over time, and the insurer guarantees to credit it with interest at a rate set by the contract. In exchange, your money is meant to stay in the annuity for an agreed period, and later it can be paid back to you as income.

The word fixed refers to the guaranteed rate. Unlike products whose returns rise and fall with the market, a fixed annuity credits a set rate, which is what gives it its predictability.

In short: a fixed annuity is an insurance contract that grows your money at a guaranteed rate and can later pay it back to you as income.

A fixed annuity generally moves through two phases.

• The accumulation phase. Your money earns interest at the guaranteed rate. Because growth is tax deferred, you do not pay tax on the interest until you withdraw it, which can let the balance compound faster than a fully taxable account.
• The payout phase. When you are ready, you can convert the annuity into a stream of payments. You typically choose the structure, such as payments for a set number of years or payments that last the rest of your life.

The guarantee is a central feature. The insurer promises the credited rate and the income terms, and that promise is backed by the insurer's ability to pay claims rather than by federal deposit insurance. Because contract terms vary, please contact us to discuss your options.

In short: a fixed annuity grows at a guaranteed, tax-deferred rate during accumulation, then can convert into income for a set period or for life, backed by the insurer.

Annuities come in several types, and the difference is mostly about how the money grows.

• Fixed. Credits a guaranteed rate, so the return is predictable and does not fall with the market.
• Variable. Ties returns to investment options you choose, so the balance can rise or fall with those investments.
• Indexed. Links growth to a market index with certain limits and protections, sitting between fixed and variable in behavior.

A fixed annuity is the most conservative of the three. It trades the chance of higher market-based returns for a known rate and a steadier outcome. Which type fits depends on how much certainty you want and how much risk you can accept, so please contact us to discuss your options.

In short: a fixed annuity credits a guaranteed rate, while variable and indexed annuities tie growth to markets, so fixed is the most predictable and conservative choice.

A fixed annuity tends to suit people who value certainty in part of their retirement plan.

• Savers near or in retirement. Those who want a portion of their money to earn a known rate without market swings.
• People who want predictable income. A fixed annuity can turn savings into payments you can count on, including options that last for life.
• Those seeking tax deferral. Savers who have used other tax-advantaged accounts may value the deferred growth an annuity offers.

It is generally less suited to money you may need on short notice, since annuities are designed to be held for a period. Because the fit depends on your goals and timeline, please contact us to discuss your options.

In short: a fixed annuity fits savers who want guaranteed growth, predictable income, or tax deferral, and less so money you might need on short notice.

Before committing, it helps to understand the trade-offs that come with the guarantee.

1. Surrender period. Many fixed annuities charge a surrender fee if you withdraw more than a set amount during the early years, so confirm how long that period lasts.
2. Liquidity. Because access is limited during the surrender period, keep separate savings for emergencies.
3. Backing. The guarantee rests on the insurer's financial strength rather than federal deposit insurance, so the insurer's stability matters.
4. Your goals. Be clear on whether you want growth, income, or both, since that shapes the contract you choose.

Because these features vary widely between contracts, please contact us to discuss your options before deciding.

In short: weigh the surrender period, your need for liquidity, the insurer's strength, and your own goals before buying a fixed annuity.