Is a Fixed Annuity Right for You and Your Retirement?

Learn how fixed annuities operate. Fisher Investments breaks down annuity features, costs and challenges.

A fixed annuity is the most basic of annuities commonly offered to retirement investors. This type of annuity is often referred to as longevity insurance and provides the owner a guaranteed income stream during retirement in exchange for insurance premiums. Before the owner begins taking payments, the deposited premiums earn a flat (or “fixed”) rate of return. These annuities serve to transfer the risk of outliving assets from the annuity owner to the insurer. However, the specific features and riders associated with a fixed annuity can vary widely and have varying degrees of effectiveness for a particular individual.

Annuity salespeople may tell you fixed annuities’ guaranteed return rates mean these contracts eliminate market risk—but, in reality, fixed annuities are never risk free. Rather, they simply let you trade one risk for another. Investors looking to provide for their retirement lifestyle must look critically to figure out if this type of product is right for them.

Immediate vs. Deferred Annuities

Even under the banner of “fixed annuities,” there are many varieties. One of the main distinguishing features is the length of their accumulation phase. With an immediate fixed annuity, you pay the premium upfront as a single, lump-sum premium. There is little-to-no accumulation period and you begin receiving income no later than one year after purchase.

In deferred fixed annuity products, on the other hand, annuitization occurs at a later date. Under the terms of a deferred annuity contract, the insurance company sets the interest rates you can earn on your principal. Once you annuitize the contract, the income payment is set and will generally not change for the duration of the contract (unless you purchase a potentially costly “rider”).

Riders: How the attractions of a fixed annuity may lead to more drawbacks

Another commonly marketed feature of some annuities are the various “guarantees,” like “guaranteed income for life,” “guaranteed growth,” “death benefits” or “long-term care insurance.” While these features—known as riders—may make a fixed annuity seem attractive, they often come with additional fees or expenses that can quickly eat into your return. Though riders are less common with fixed annuities than indexed or variable annuities, these fees can have a larger impact on their rates of return, which tend to be lower than other types of contracts (especially when inflation is factored in, as we will discuss).

How Risky Is Your Fixed Annuity, Anyway?

Fear of market risk is one of the most common reasons investors choose annuities, but investors often overlook the many types of risk annuities carry. Since a fixed annuity provides a consistent rate of return, investors often see them as a less volatile investment vehicle—a key attraction. But it’s important to remember: Our instincts to avoid risk often act against us when it comes to investing. Safe returns from a fixed annuity will look more attractive in markets where interest rates and returns are low, but these periods may also be when annuities are offering their lowest rates due to high demand.

Conversely, buying an annuity with a lower, fixed return may seem unwise when stock markets are showing double-digit returns and interest rates are rising. This may also be one of the few times you’ll find more attractive interest rates on  fixed annuities, as insurers have to offer more generous terms to attract investors. Though this situation also begs the question, is the annuity’s safety worth giving up the opportunity for potentially higher long-term growth?

Purchasing a fixed annuity too early may create significant opportunity costs. These products rarely adjust your payments to keep pace with inflation, so the purchasing power of your payments may decline over time. Given that annual inflation alone historically averages around 3%, a low annuity rate may not help you achieve the growth needed to meet your retirement goals.i This is particularly risky in a world where medical advancements continually extend our average life expectancies. Plus, a fixed annuity is likely to come with rigid terms and conditions such as stiff surrender fees, which make it financially painful for annuitants to reinvest their principal or to seek a better deal elsewhere.

So, what are some important questions to consider before purchasing a fixed annuity? Fisher Investments believes you’ll be well served by asking the following questions:

  • How does the annuity affect your ability to access your retirement funds? A fixed annuity, like any annuity, has two phases: growth (accumulation) and pay-out (annuitization). In the first phase, there are usually limits on how much can be withdrawn from the account each year (such as 10% annually, for example). Beyond this, there can be major penalties for early or excessive withdrawals. In the pay-out phase, it’s generally impossible to get any additional principal back on demand, as the funds have become the property of the insurer. Understanding how your unique annuity contract is structured can help you determine if this provision creates additional risk for your retirement.

  • How likely is there to be a shortfall in your retirement savings given your projected time horizon and cost of living? All annuities are, at their core, a form of longevity insurance. Their primary value comes from their ability to protect owners from outliving their assets. Consequently, if you believe you’re at little risk of outliving your assets, a fixed annuity is unlikely to provide much benefit. You may want to consult an experienced adviser who can analyze your portfolio relative to your goals and advise you on whether this trade-off is sensible.

  • How will inflation impact your annuity payments? Most annuities are structured to make consistent periodic payments. Over time, inflation  can erode the purchasing power of these payments. While some annuity options offer increasing payments over time, they generally begin by offering lower payments up front. Depending on your time horizon, the slower return up front could significantly reduce the likelihood of seeing the full promised benefit from your annuity.

Still have more questions about fixed annuities or any other type of annuity? Fisher Investments has extensive experience helping those in, nearing or planning their retirement to develop investing strategies that are properly aligned with their goals. Having seen many clients locked into annuity contracts that simply didn’t meet their needs, we’ve developed our Annuity Evaluation service to help qualified investors understand these products via an honest and thorough analysis.ii Our Annuity Counselors can break down these complex contracts (or even discuss them directly with their providers) to provide clear feedback on what is actually being offered.

Contact us today to request an appointment with an Annuity Counselor to discuss your fixed annuity, or to discover more about how we can help you develop a robust investment portfolio to support your retirement.


i Source: FactSet, as of 4/14/2020. Inflation rate was 2.89% based on US BLS Consumer Price Index from 12/31/1925 to 12/31/2019.

ii Terms and conditions apply

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.