Fixed, indexed, and immediate annuities each solve a different retirement problem. Here is how they differ, and who each one tends to fit.
When people talk about annuities, they often talk about them as if they were one single product. They aren’t. There are several types, each one built to solve a different retirement problem. Knowing the differences is the first step toward figuring out whether any of them fit your situation.
At its core, an annuity is a contract with an insurance company. You put in money, either as a lump sum or a series of payments, and the insurer agrees to pay you income at some point, either soon or years from now. What changes from one type to the next is how your money grows, how much risk you take on, and when the income starts. Here are the three you’ll run into most often.
A fixed annuity pays a set interest rate for a specific period. There’s no guesswork and no exposure to market swings, which is exactly why people who value predictability tend to like them. You know what your money is earning, and your principal isn’t riding the ups and downs of the market.
Picture Susan. She’s about five years out from retirement and wants to shield part of her savings from a bad market year right before she stops working. She moves a portion of her retirement funds into a fixed annuity, which helps protect her principal while still earning a steady, predictable return.
An indexed annuity ties your potential growth to a market index, such as the S&P 500, while typically protecting you from market losses. The trade is that these contracts usually cap how much you can gain in a strong year. In exchange, you get a middle path: some of the upside when markets do well, and a cushion when they don’t.
Picture Mark. He plans to retire within the next ten years but the thought of a market downturn keeps him up at night. He puts a portion of his savings into an indexed annuity, which lets him pursue growth linked to a market index while guarding against the downturns he’s worried about.
An immediate annuity does what the name suggests. It starts paying you income shortly after you buy it, often within a year. Retirees tend to use these when they want to turn a chunk of savings into reliable income right away, rather than waiting for it to build.
Picture John. He retires at 67 and wants a little more monthly income on top of Social Security. He allocates part of his savings to an immediate annuity, which sends him monthly payments for the rest of his life.
A multi-year guarantee annuity, or MYGA, is a type of fixed annuity built to sidestep market volatility while your money grows tax-deferred. You put in a single premium, and the insurance company pays you a fixed interest rate for a set number of years, usually somewhere between one and ten. When that guaranteed period ends, you can leave the money in at a new rate, turn it into an income stream, or withdraw it. All MYGAs are fixed annuities, but not all fixed annuities are MYGAs. The difference comes down to how the interest is calculated and how long it stays guaranteed.
The trade-off is flexibility. Pulling money out early can trigger surrender penalties, and some contracts apply a market value adjustment during the surrender period. In exchange, you get a predictable, guaranteed rate with no exposure to market losses, and you can pass any remaining balance on to the people or causes you care about.
A variable annuity offers periodic payments in exchange for a lump sum that grows tax-deferred until you begin withdrawing. During the accumulation phase, you spread your money across investment options called subaccounts, for example a mix of bonds, U.S. stocks, and international stocks. Those investments rise and fall with the markets, so your money has real room to grow, but you can also lose money in a variable annuity. When the payout phase begins, you can take your money as a lump sum or as payments over a set period or for the rest of your life.
Because your money is invested in the market, a variable annuity carries more risk than the other types, and your principal can decline in a downturn. Fees also tend to run higher, and extra features and riders add to the cost, so they reward a careful read before you sign. In return, they include a death benefit, and sometimes a stepped-up death benefit that can lock in your investment gains.
| Type | How it grows | Principal risk | When income starts | Who it may suit |
|---|---|---|---|---|
| Fixed / MYGA | Fixed, guaranteed interest rate for a set period. | Protected from market losses. | Deferred; income later or at the end of the term. | Savers who want predictable, guaranteed growth without market risk. |
| Fixed indexed | Interest tied to a market index, up to caps, spreads, or participation rates. | Principal protected; a down year earns zero interest rather than a loss. | Deferred; optional income riders available. | Those who want market-linked growth with downside protection. |
| Immediate (SPIA) | Not designed for growth; converts savings into income. | Principal is exchanged for income and is often illiquid. | Soon after purchase, usually within a month. | Retirees who want guaranteed income right away. |
| Variable | Invested in subaccounts that rise and fall with the markets. | Can lose principal in a market downturn. | Deferred; income begins in the payout phase. | Those wanting market-based growth potential and comfortable with the risk. |
There’s no single “best” annuity, because the right choice depends on what you’re trying to accomplish. Someone protecting principal has different needs than someone chasing growth or someone who wants income to start tomorrow. And no annuity should be judged on its own. It works best when you weigh it against everything else in your retirement plan.
If you’d like help sorting out which type, if any, makes sense for you, we’re glad to walk through it. Consider scheduling a complimentary, no-obligation call. We can look at your goals together, talk through your income options, and help you decide whether an annuity belongs in your plan.
What is the difference between an immediate and a deferred annuity?
Some annuities offer immediate payment options, known as immediate annuities. Others are designed for growth and will not pay out funds until a set period of time has passed, often years. Those are deferred annuities.
What is a single premium immediate annuity (SPIA)?
A single premium immediate annuity is one of the most consumer-friendly choices for retirees who need immediate income. With an SPIA, you convert retirement savings, such as funds from a 401(k), into an annuity contract that provides a permanent stream of income, usually beginning within one month of signing the contract.
Are all fixed annuities MYGAs?
No. While all MYGAs are fixed annuities, not all fixed annuities are MYGAs. Although they share features, the main difference is how the interest is calculated and for how long it may be guaranteed.
What is a fixed indexed annuity (FIA)?
A fixed indexed annuity is a fixed annuity product that tracks a selected stock market index, such as the S&P 500 or the Dow Jones Industrial Average, and can earn interest tied to that index while protecting a portion of your principal. If the index goes down, the worst that can happen is that you earn zero interest for that year.
What is a variable annuity?
A variable annuity offers periodic payments in exchange for a lump sum that can grow tax-deferred. During the accumulation phase you allocate payments to investment options called subaccounts. Your investments fluctuate with performance, so you could grow your money significantly, but you can also lose money in a variable annuity.
Do all annuities share the same features?
Most annuities share a few features: tax-deferred growth that is taxed at withdrawal, the ability to bypass probate with a properly named beneficiary, fees and charges including potential surrender penalties, and the option to be funded with after-tax or pre-tax dollars.
Annuities are long-term products designed for retirement income. All guarantees are backed by the financial strength and claims-paying ability of the issuing company and do not apply to the performance of the variable subaccounts available in variable annuities. Variable annuities are subject to risk, including the possible loss of principal. Securities-related advice and transactions must be provided by an appropriately licensed individual currently registered with a Registered Investment Advisor or Broker/Dealer. Annuities involve fees and charges, including possible surrender penalties. Product and feature availability may vary by state. This material is for informational purposes only and is not intended as legal, tax, or investment advice. HiWire Financial offers insurance products and services.
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