2025 Fixed Annuities: How They Secure Your Retirement Income & Costs Explained

Fixed annuities offer a dependable, guaranteed income stream for retirees, though they may come with higher fees compared to other investment options.

If you're employed, you might contribute to a 401(k) plan through your employer. Beyond that, retirement savings can include IRAs, Roth IRAs, health savings accounts (HSAs), or fixed annuities.

Fixed annuities, typically sold by insurance companies and financial firms, come in various forms. Many investors use them to complement their retirement savings. But is a fixed annuity the right choice for your retirement strategy? Let's explore payout structures, tax implications, and important factors to consider.

Key Insights

• Fixed annuities guarantee a fixed interest rate on your contributions during the accumulation phase.
• The annuity type—immediate or deferred—determines when income payments start.
• Investment growth is tax-deferred until withdrawals begin, typically at retirement.
• Withdrawals are taxed as ordinary income, not at the lower capital gains rate.

Understanding Fixed Annuities

A fixed annuity is a contract between you and an insurance company. You invest funds—either as a lump sum or through periodic payments—and receive a guaranteed interest rate during the accumulation period. Later, during the payout phase, the annuity provides a predictable income stream.

Unlike variable annuities, which fluctuate based on market investments like mutual funds, fixed annuities prioritize stability, offering less growth potential but with assured returns.

Immediate vs. Deferred Fixed Annuities

Immediate annuities begin income payments almost right after a lump-sum purchase and typically pay out for life, making them popular among retirees concerned about outliving their savings.

Deferred annuities allow you to accumulate funds over time, with payouts starting at a future date you select—ideal if retirement is several years away.

How Fixed Annuity Payouts Work

When you're ready to receive payments, the insurer calculates your periodic income based on factors like your account balance, age, life expectancy, and whether payments continue to a spouse after your passing.

Waiting longer to start payouts generally results in higher monthly payments. Many opt for joint and survivor options to ensure income continues for both spouses.

Some contracts include guaranteed payout periods, protecting heirs if payments stop prematurely, though these features typically reduce monthly income amounts.

Tax Treatment of Fixed Annuities

Fixed annuities offer tax advantages, with contributions often growing tax-deferred until withdrawal. However, payouts are taxed at ordinary income rates when received.

This tax treatment is similar to other retirement accounts, and many retirees benefit from lower tax brackets during retirement.

Important Considerations

Be aware that annuities can have higher fees than mutual funds or CDs, including commissions and mortality and expense charges averaging around 1.25% annually. Additional riders or benefits may increase costs further.

Early withdrawals during the surrender period (usually 6-8 years) may incur penalties, and distributions before age 59½ could face tax penalties, though some contracts allow penalty-free withdrawals of up to 10% for emergencies.

Consult a financial advisor before accessing funds prematurely or purchasing an annuity.

Impact of COVID-19 on Annuities

The CARES Act in 2020 allowed penalty-free withdrawals up to $100,000 from retirement accounts, including annuities, but this relief expired after 2020. Withdrawals in 2021 and beyond may be subject to penalties and income taxes.

Some states have offered grace periods for annuity premium payments due to pandemic hardships, such as New York’s provisions requiring insurers to allow late premium catch-ups.

Final Thoughts

Fixed annuities remain a valuable tool for retirees seeking guaranteed income and tax-deferred growth. They offer stability but come with costs and tax implications to weigh carefully.

Before committing, consider consulting a retirement planning expert to ensure fixed annuities align with your financial goals and retirement timeline.

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