Are fixed annuities safe? Pros, cons & considerations

Knowing you have enough fixed income to meet your lifetime needs can provide a valuable sense of security and help you retire with confidence. The stability offered by fixed annuities may help you fulfill your financial goals, so you can focus on what’s most important to you. While fixed annuities are considered one of the safest types of annuities, there are some risks and downsides to consider along with the benefits.

In this article, we’ll cover:

• Are fixed annuities safe?
• The pros & cons of fixed annuities at a glance
• The potential downsides & risks of fixed annuities
• The benefits of fixed annuities
• Who should consider buying a fixed annuity

Fixed annuities are considered a secure type of annuity. They offer a guaranteed fixed interest rate option, along with the features and tax benefits of a traditional annuity. Knowing what rate to expect can help provide a predictable income stream, regardless of economic ups and downs.

Insurance companies invest the annuity premiums paid to them into large, diversified portfolios of stable, highly-rated investments, such as public and private bonds, equity and real estate. Even if these investments lose money for the insurer, your annuity contract maintains your principal and any interest you have earned.

Since a fixed annuity is an insurance product, it’s not insured by the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC). Given these facts, it’s important to have confidence in the company you may wish to purchase an annuity from and it’s important to review the insurance company's history and financial strength (as determined by an objective industry rating agency such as AM Best, Fitch, Moody's or Standard & Poor's).

Buying a fixed annuity can be a practical way to meet your lifetime income needs—or those of a loved one. These are seven rewards you can expect from a fixed annuity contract.

During the fixed period, you earn a fixed interest rate on your annuity's value, regardless of what happens in the financial markets. That fixed interest rate can help you plan for retirement and might make you feel comfortable taking on more risk in other parts of your portfolio.

If you buy a deferred fixed annuity (as opposed to an immediate fixed annuity), your premiums enjoy faster compound growth than if you held the money in a taxable account that paid the same interest rate. You don't owe ordinary income tax on the growth until you take withdrawals or annuitize. Usually, you do this during retirement when your income and tax rate may be lower.

You may choose a fixed annuity with a death benefit so that if you die before you get back what you paid into your contract, your beneficiary gets your premium plus any earnings, less any withdrawals or fees.

A fixed annuity may help protect you against the risk of outliving your assets and provide a reliable retirement income stream for as long as you live, depending on the payout type you select.

You can choose to receive income payments from your fixed annuity for a fixed period or a specified amount. You can choose single life to get income for the rest of your life or joint life so your spouse continues to receive income after you die.

You may not be comfortable committing six figures to an annuity, especially if you haven't owned one before. Thrivent's fixed annuities have minimums as low as $5,000.

Aside from surrender fees, which you can avoid incurring with careful planning, a fixed annuity has minimal costs. With Thrivent, you don't pay a contract maintenance charge, administrative/custodial fee or account service fee unless you take withdrawals that drop your annuity's accumulated value below $5,000. You also don't pay risk charges (no annual mortality and expense charges) or front-end sales charges.

As with any financial product, fixed annuities come with risks as well as rewards. But compared to some other types of annuities (such as variable annuities), fixed annuities and multiyear guaranteed annuities have the least risk and may be the most predictable.

The insurer assumes the investment risk with a fixed annuity contract. By comparison, the contract holder (that's you) assumes the investment risk with a variable annuity.

These are some of the risks you should understand before purchasing a fixed annuity.

No one can predict what may happen to inflation over time. The set payouts from your fixed annuity may not keep up with inflation, meaning their buying power may decrease over time. To lessen this risk, you may be able to choose a payout option that adjusts for inflation.

Unlike a stock market investment, a fixed annuity has a set interest rate for the duration of the contract period. While you don't lose money when the market goes down, you also don't earn more when the market goes up.

The contract holder and the insurance company both assume how long the contract holder may live. They also both take steps to reduce their risk of loss if they're wrong. If you choose a single-life payout and pass away shortly after you start receiving income from your annuity, you might get back less than what you had paid in premiums. However, you can choose different types of payouts, such as joint-and-survivor or period certain, to make sure someone you care about receives the income you would have received had you lived longer.

A fixed annuity can pay you a set income for life, but it depends on the type of payout you choose. If you choose a period certain payout (such as 10 years of income), your annuity may stop paying income while you're still alive and need a consistent income.

This is one of the ways you can lose money with a fixed annuity. Once you begin paying premiums for an annuity, the insurance carrier expects to hold that money until you're ready to receive regular payments from it. If you decide to withdraw money from your annuity sooner, you usually have to pay a surrender fee (but it may be waived under certain circumstances, like entering a nursing home or getting a terminal diagnosis). The fee is a percentage of the amount you are withdrawing, and the earlier in your contract you withdraw it, the higher the fee may be. Depending on when you take a withdrawal and how much you take out, you could lose money and forfeit the earnings you had originally planned. Withdrawals before age 59½ may also may trigger a 10% federal income tax penalty.

Could a fixed annuity enhance your retirement plan?

With a fixed interest rate, you’ll know how much guaranteed earnings you can count on, no matter how the market performs.

Explore fixed annuities

If you're building a retirement plan and want to build on the minimum income you're expecting from Social Security or a pension, or if you're concerned about outliving your retirement savings, you might consider buying an annuity.

Connect with a Thrivent financial advisor who can help you evaluate whether a fixed annuity is right for you and help you create a comprehensive retirement strategy you can feel confident about.