Fixed Income Annuities
An annuity is a contract with an insurance company that converts a lump sum into guaranteed income, often for life. Done right, it's the closest thing private markets have to a personal pension. Done wrong, it's an expensive product sold for the wrong reasons.
What it is.
AJ holds an RICP designation from The American College, the credential specifically built around retirement income planning. Annuity recommendations at this agency start with a real income plan, not a product pitch. If an annuity is wrong for your situation we will tell you.
Annuities come in flavors. Single-Premium Immediate Annuity (SPIA) starts paying right away. Deferred Annuity grows tax-deferred and you turn on income later. Multi-Year Guaranteed Annuity (MYGA) is the annuity equivalent of a CD, with a guaranteed rate for a fixed term. Fixed Indexed Annuity (FIA) credits interest based on a market index with downside protection. Variable Annuity has market sub-accounts and the most fees. We only recommend the simpler products in most cases.
Below is what each one actually does, where they fit in a retirement plan, and the surrender-period and fee dynamics that determine whether they're a good idea.
Pre-retirees and retirees looking for guaranteed income, anyone who's filled their tax-advantaged buckets and wants tax-deferred growth, and anyone funding required minimum distributions or replacing a pension that doesn't exist.
What it covers.
Each policy is a stack of named coverages. Required parts are mandated by state law. Recommended parts are what we put on most policies. Optional parts depend on your situation.
Single-Premium Immediate Annuity (SPIA)
Hand the carrier a lump sum, they start paying you a guaranteed monthly income (for life, for a fixed period, or for a joint life). Simplest annuity. Closest thing to a do-it-yourself pension. Right for retirees who want to floor a portion of their income with a guarantee.
Multi-Year Guaranteed Annuity (MYGA)
Like a CD, but tax-deferred and issued by an insurance company. Guaranteed interest rate for a fixed term (3, 5, 7, 10 years). Currently competitive with bank CDs and often higher. Right for clients building a fixed-income ladder inside a tax-deferred wrapper.
Fixed Indexed Annuity (FIA)
Earnings tied to a market index (S&P 500 most commonly), with a floor (often 0%) and a cap or participation rate. You can't lose money to market drops, but your upside is capped. Right for clients who want some equity exposure without the downside.
Deferred Income Annuity (DIA)
Pay a premium today, receive guaranteed income starting at a future date. Useful for clients in their 50s and 60s who want a guaranteed income stream starting at 70 or 75. Often the cheapest way to lock in lifetime income.
Lifetime Income Rider
Optional rider on deferred annuities that guarantees lifetime income regardless of market performance. Costs an annual fee (often 0.85% to 1.25%). Right when guaranteed lifetime income is the priority.
Death Benefit
Most deferred annuities pay the account value (or guaranteed minimum) to your beneficiaries if you die before annuitizing. Avoids probate. Many add an enhanced death benefit rider for additional cost.
Long-Term Care Rider
Some annuities allow you to draw down the contract value for qualifying long-term care expenses with reduced or waived surrender charges. Worth evaluating against standalone LTC and hybrid life/LTC.
Free Withdrawal Provision
Most contracts allow you to withdraw a percentage (usually 10%) of the account value annually with no surrender charge. Important liquidity feature, often missed when comparing products.
When it kicks in.
Real situations we see in the agency. The point is to show how each layer of coverage maps to actual life, not to scare you.
65-year-old retiree, no pension
Has $1.2M in retirement assets. Concerned about outliving the money. We allocate $300K to a SPIA to cover essential monthly expenses with a guaranteed lifetime check, leaving the remaining $900K invested for growth and inflation protection.
55-year-old executive maxing 401(k)
Wants additional tax-deferred savings beyond IRA and 401(k) limits. A MYGA inside a non-qualified account provides 4.5% to 5.5% guaranteed for 5 years with no contribution limits and tax deferral until withdrawal.
Couple in their 60s replacing a pension
One spouse just left a job that didn't carry their old pension forward. We use a joint-life SPIA to recreate a lifetime income stream that pays as long as either spouse is alive.
70-year-old facing first RMD
Required Minimum Distributions starting on traditional IRA assets. We use a Qualified Longevity Annuity Contract (QLAC) to defer some RMDs by purchasing a deferred income annuity inside the IRA.
Conservative investor concerned about a downturn
Doesn't want to lock in a guaranteed income but wants market upside without market risk. A Fixed Indexed Annuity provides a 0% floor with capped index participation, replacing a portion of bond-allocation in the portfolio.
Key terms.
Plain-English definitions. The vocabulary insurance carriers assume you already know.
- 01Surrender Period
- The number of years (often 3 to 10) during which withdrawing more than the free-withdrawal amount triggers a surrender charge. Critical to match the surrender period to your liquidity needs.
- 02Surrender Charge
- A fee for early withdrawal beyond the free amount. Usually starts high (around 7% to 10%) and declines each year. Goes to zero at the end of the surrender period.
- 03Annuitization
- Converting the accumulation value into a stream of payments. Once you annuitize, the contract typically can't be reversed. Most deferred annuities never get annuitized: people take income via a rider or systematic withdrawal instead.
- 04Cap Rate / Participation Rate
- On indexed annuities, the cap is the maximum interest credited in a year (e.g., 8% cap means you earn at most 8% even if the index returns 20%). Participation rate is the percentage of the index return you get (e.g., 60% participation on a 10% index gain = 6% credited).
- 05Tax Deferral
- Earnings inside an annuity grow tax-deferred until withdrawn. Withdrawals are taxed as ordinary income (not capital gains). Pre-59½ withdrawals usually carry a 10% IRS penalty.
- 061035 Exchange
- Tax-free rollover from one annuity to another (or from a life policy to an annuity). Useful when an old contract is underperforming or has higher fees than current alternatives.
Common questions.
Questions clients ask before they get on the phone with AJ. If yours isn’t here, just call.
Some are. Variable annuities with high fees and complex riders deserve their reputation. Simple annuities (SPIAs and MYGAs) are straightforward, low-fee, and often the right tool for guaranteed income or tax-deferred fixed income. The product gets a bad rap from how it's sometimes sold, not from what the simpler products actually do.
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