Types of fixed deferred annuities: Which is right for you?

As you set your goals for the years ahead, particularly retirement, you also naturally think about how you can reliably fund them. You may have a 401(k) plan or another employer plan, which are solid pillars of a financial strategy, but many people also consider getting an annuity.

Fixed annuities are a tool that can provide you with a guaranteed minimum interest rate and annuity payout options later in life. They offer financial security that can help reduce the risk you'll outlive your savings.

Different types of fixed deferred annuities—such as a fixed rate, fixed index and multi-year guarantee—are better suited to some people than others. To help get the most out of a fixed annuity, it's important to understand the structure of each and how it will fit with your long-term financial plans.

Each product in the fixed annuity family has certain characteristics that set them apart, but they share some basic traits. A main one is their purpose—to provide you with guaranteed income in retirement that may last for a certain number of years or the rest of your life.

Here are some of the benefits you can look forward to with fixed, fixed index and multi-year guarantee annuities:

• Interest rate. Depending on the annuity, you may have a predictable interest rate or a rate that varies based on the performance of a market index.

• Tax-deferred growth. Any interest that accumulates in your annuity contract is not taxed until you take a withdrawal or start receiving annuity payments.

• Protection against market volatility. Unlike stock market investments, you will not experience losses related to market downturns.

Fixed annuities also have drawbacks to consider:

• They do not benefit from positive market performance. The tradeoff to being protected against losses is that your gains don't have as much potential as market-based investments long-term.

• Limited liquidity without a charge. Once you put money into an annuity, you typically only can withdraw a certain percentage each year—perhaps 10% of the annuity’s value—without paying surrender charges.

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The 4 types of annuities

How you build and then convert your retirement funds into guaranteed income will depend on the type of annuity you choose. Get a refresher on the four main types of annuities to choose from.

Let's go

Now, let's get into the details that make each type of fixed annuity unique.

A fixed rate annuity earns interest at a guaranteed minimum interest rate for the life of the contract. With a fixed interest rate, you know in advance how much your annuity will grow.

Fixed rate annuities have inflation risk because the inflation rate may be higher than the annuity's fixed interest rate. Inflation can cause your annuity to lose purchasing power even as it provides a certain level of stability through the guaranteed interest rate.

• Learn more about the risks and benefits of fixed annuities.

A fixed indexed annuity has an interest rate that fluctuates based on the performance of a market index, such as the S&P 500. If the index has positive returns, you may earn more interest than you would with a fixed rate annuity.

The interest rate is capped, which means that even if the market index is doing exceedingly well, you'll only get a rate of return up to the cap (e.g., 4%). But fixed indexed annuities also give you downside protection. If the index experiences negative returns, you won't receive interest, but your annuity will not be at risk of loss.

Like a fixed rate annuity, a fixed indexed annuity can be funded with a single payment or a series of payments.

Both fixed rate and fixed indexed annuities can offer you annuity payments from the annuitization point onward. Inflation risk with fixed indexed annuities is uncertain. The opportunity to earn a higher rate of return means you could outpace inflation in some years. Your outcomes will depend on how the index performs and the rate of inflation, both of which are unpredictable.

• Read more about the difference between fixed and fixed indexed annuities.

A multi-year guarantee annuity (MYGA) is a fixed-deferred annuity that earns interest at a guaranteed rate for a specified period, typically three to nine years. At the end of the period, you typically have these options: You can withdraw your funds, renew your annuity at then-current rates, choose an annuity payment option, or leave the money with the insurer, where it will earn interest at a renewable one-year rate set by the company.

Unlike fixed rate and fixed indexed annuities, MYGAs are usually funded with a single premium. Inflation risk depends on how long you lock in your guaranteed rate and what happens with inflation during that time. If inflation goes down, your earnings could outpace inflation. If inflation goes up, your earnings could be less desirable.

• Dive deeper: How does a MYGA compare to a CD?

When thinking about how an annuity could help you meet your goals, you'll want to consider whether you want to buy an annuity with a lump sum or a series of periodic payments, how soon you want to annuitize, the interest rate environment, your risk tolerance and your guaranteed income needs.

• Fixed rate annuities may be best for people whose top priorities are a guaranteed minimum interest rate and a reliable source of retirement income.

• Fixed indexed annuities may be best for people who want the opportunity to earn a higher interest rate with protection from market losses—and people who don't need the security of a guaranteed interest rate.

• MYGAs may be best for people who want a guaranteed interest rate for a specified time period.

Is a fixed annuity right for you? Let’s figure it out together. Our financial advisors can help you explore annuities and other options to help you determine what makes the most sense for you and your future. Connect with a Thrivent financial advisor near you.