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What is a fixed annuity & how does it work?

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Brat Co/Brat Co / Stocksy United

The bottom line:

A fixed annuity can guarantee you an income stream for a period of time.
A fixed annuity’s value grows at a set interest rate.
A fixed annuity's earnings are tax-deferred.

In this article, we'll cover:

What is a fixed annuity?

A fixed annuity is a financial product that guarantees a fixed interest rate for a specified period of time—for example, 2%—and provides an income stream in retirement. With a fixed interest rate, you know in advance how much your annuity will grow and how much income it will pay out. That predictability helps some people feel more comfortable about the stability of their retirement plans.

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Benefits of a fixed annuity

A fixed annuity offers four key features: income in retirement, a fixed interest rate for a specific length of time, tax-deferred growth and potential to pass money on to your heirs.

1. Income in retirement

Like other annuities, a fixed annuity can guarantee that you receive ongoing income payments starting in retirement and continuing for a set period or the rest of your life.

2. Fixed interest rate

A fixed annuity's value increases over time, based on a fixed interest rate. Some people prefer this option over a variable annuity, which earns or loses value based on how the market performs. With a fixed annuity, the initial rate is guaranteed for a certain portion of the contract. Rates can increase or decrease after that time, depending on your contract details.

One type of fixed annuity called a multi-year guarantee annuity, or MYGA, guarantees an often higher fixed interest rate for the entire contract term.* When that term is up, you can either select a new term, surrender the contract, or do nothing and allow the MYGA to move into a fixed account earning a guaranteed minimum interest rate.

3. Tax-deferred growth

As with a 401(k) or a traditional IRA, a fixed annuity’s earnings are tax-deferred. Taxes aren't taken out while the annuity is growing, which leaves more money there to earn interest. Later, when you receive income payments, that money is subject to income tax. But many people expect to be in a lower tax bracket during retirement than they are during their working years. So, by delaying taxation on their annuity's earnings, they expect to pay at a lower rate.

4. Potential to pass money on to your heirs

Most fixed annuities also offer a standard death benefit. That’s money paid to your beneficiaries if you pass away before annuity payouts begin. Optional death benefits may require a policy rider that comes with an additional cost.

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How to fund a fixed annuity: Single premium vs. flexible premium fixed annuities

You have two options for how to fund a fixed annuity: a lump-sum or a series of premium payments.

1. Single premium fixed annuities

Funded with a one-time, lump sum. Often done by rolling over a 401(k) or IRA or by using money obtained through the sale of another asset.

2. Flexible premium fixed annuities

Funded with a series of premium payments. As you continue making payments, the annuity's value grows at your fixed interest rate.

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How are fixed annuity premiums invested?

Fixed annuities are insurance contracts issued by insurance companies. Their premiums are invested into portfolios made up of predominantly public high-quality fixed-income investments providing income and reducing volatility. Other asset classes may be added to enhance investment returns or to seek higher returns in a low-rate environment. But ultimately, the performance of those investments doesn't affect your earnings. You’re always guaranteed the fixed interest rate stated in your contract.

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Timing of income: Immediate vs. deferred fixed annuities

Immediate and deferred fixed annuities differ based on how quickly they begin providing income.

Immediate fixed annuities

An immediate fixed annuity starts its payouts shortly after you put money in. You fund it with a single premium. Soon (within a year—and it may be within 30 days), it starts paying you income. That leaves little time for earnings to accumulate.

Deferred fixed annuities

A deferred fixed annuity requires a waiting period between the time you start putting money in and the time you receive its income stream. You can fund a deferred fixed annuity with a single premium or a series of payments. Your income withdrawals begin when you retire (or at some other future date, as stated in your contract). Between the time you start making payments and the time you begin taking withdrawals, earnings build up. That adds to the size of the income payments you receive. Many people use deferred fixed annuities as part of their overall retirement strategy.

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Fixed annuities vs. variable annuities: Comparing differences

Growth potential

Fixed and variable annuities grow in different ways.

  • A fixed annuity is guaranteed to rise steadily in value due to its predetermined, fixed interest rate.
  • A variable annuity’s value can fluctuate up and down because it’s tied to investments in the market.

Interest rate

  • A fixed annuity only promises a guaranteed minimum interest rate. But that rate helps protect against the possibility of loss and offers the advantage of knowing ahead of time exactly how much you’ll receive in income payments later.
  • A variable annuity’s interest rate will likely be higher than a fixed annuity’s when the market is strong. But if the market trends downward, a variable annuity could earn less—or even lose value—compared to a fixed annuity containing the same principal amount.
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Fixed annuities vs. indexed annuities

In addition to fixed and variable annuities, there are other types of annuities. One type is an indexed annuity. Some or all of an indexed annuity’s earnings is based on the performance of a particular market index (for example, the S&P 500). However, there may be a cap on the maximum interest you can receive. Or your interest may be limited to a percentage (for example, 70%) of the index’s actual interest rate.

What are the four types of annuities?
Need a refresher on annuities? Compare the differences between the four basic types to get a sense of which may be right for you.

Read now

Lifetime vs. period-certain payout options

With a fixed annuity, you may have options for how to receive your payouts. Among those options are lifetime and period-certain payouts. These differ based on the duration of the income payments they provide.

1. Lifetime payout option

A lifetime payout option continues a fixed annuity's payouts throughout a person's life. There are different types of lifetime payout options. A single-life option provides income until you pass away. A joint-and-survivor option provides income to both you and your spouse. Payouts continue through the life of whoever lives the longest.

2. Period-certain payout option

A period-certain payout option (sometimes called a fixed-period or term-certain option) stops your fixed annuity's income payments on a scheduled end date. If you live past that point, you'll stop receiving income. However, if you pass away before the scheduled end date, the annuity's income payments may continue and go to your beneficiary or estate. (That depends on your contract. Some fixed annuities with period-certain payouts stop paying income on their end date or upon your death, whichever comes first.)

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What are the risks of a fixed annuity?

Fixed annuities tend to pose less financial risk than variable annuities and other investment products whose values rise and fall with the market. But that doesn't mean fixed annuities come with no risks at all.

For one thing, annuities are insurance contracts. That means their payouts are guaranteed by the insurance companies that issue them—not the FDIC, SIPC or any other federal agency. So, it's important to pay attention to the company issuing an annuity you're considering. Look for firms with high marks from objective industry rating agencies such as AM Best, Fitch, Moody’s, and Standard & Poor’s.

Depending on the details of your contract, your fixed annuity might pay out less than you paid in premiums. For example, this could occur if you choose a single-life payout option and pass away shortly after your income payments begin. The issuing insurance company might not be obligated to make payments to your spouse or estate afterward. If this possibility concerns you, you might want to look into joint-and-survivor or period-certain payout options, which could continue payments to your spouse or other beneficiaries after your death.

Although you know in advance how much you’ll receive from your fixed annuity, you can’t predict the rate of inflation. Some payouts on annuities don’t get cost-of-living adjustments, so their buying power decreases over time. However, some payout options do adjust their income payments for inflation—or they offer that feature as an optional contract rider.

As with most annuities, if you want to withdraw money from your fixed annuity before you’re scheduled to receive payments from it, you’ll likely incur a penalty charge—which can sometimes be hefty. That can dramatically decrease your annuity's value. In some cases (depending on when you make the withdrawal and how much you take out), it can even result in a net loss.

Despite the risks that fixed annuities can pose, they are a relatively low-risk product because they guarantee a continuing income stream and a fixed interest rate. That differs from variable annuities and other financial products—such as stocks and mutual funds—that rely on unpredictable markets to determine their values.

You can minimize additional risks by working with a financial advisor who can help you create a comprehensive retirement strategy. That can help you feel confident about whether a fixed annuity is a wise choice for you.

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Are fixed annuities securities?

Fixed annuities are not securities because they offer a guaranteed interest rate. The interest you earn isn't affected by market fluctuations, and the insurance company offering the product takes on all the investment risk.

In contrast, variable annuities are considered securities because the interest you accrue is tied to the market performance of the investments in your subaccounts. That means you bear the investment risk. Variable annuities are subject to regulation by the U.S. Securities and Exchange Commission (SEC).

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How can you use a fixed annuity?

Say you're 15 years from retirement. You have some money saved up and invested through a 401(k) or an IRA. But you're not sure they’ll provide enough money to support you through your retirement years.

If you have money available now—or can fit a new recurring premium payment into your budget—you could put it into a fixed annuity. That would ensure that, on a designated date (your 65th birthday, for example), you’d start receiving additional income payments that could continue through the rest of your life.

Your fixed annuity's interest rate could help you plan for retirement. You’d know precisely how much income the annuity would provide, which could help inform other decisions. For example, you might feel comfortable taking on higher risk with other investments, knowing that regardless of how they perform, the income payments from your fixed annuity would still be there for you throughout retirement.

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When should you consider a fixed annuity?

That depends on many factors, including your age, your financial goals, your retirement plans, the resources you have available, the amount of risk you wish to take on, and how long you expect to live.

Have you maxed out your allowed Roth IRA or 401(k) contributions? Would you like to put more money away to help support yourself (and, perhaps, your spouse) in retirement? If so, a fixed annuity may be worth considering. Knowing you're getting a guaranteed interest rate—and an ongoing income stream—can help build your confidence in your overall retirement savings plan.

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Get professional guidance

Want to learn more about if a fixed annuity is right for you? Connect with a Thrivent financial advisor.

*A MYGA MVA is a Multi-Year Guaranteed Annuity with market value adjustments (MVAs). MVA adjustments are applied to amounts subject to surrender charges. This can be a positive adjustment, or a negative adjustment which would reduce the annuity’s value.

This webpage provides general annuities information. It does not contain information specific to a Thrivent financial product. If you are looking for information specific to a Thrivent financial product or your existing annuity contract, please log in and refer to your contract or prospectus document—or visit our annuities product webpage.

Annuities are intended to be long term, particularly for retirement. Product availability and features may vary by state.

Withdrawals and surrenders will decrease the value of your annuity and, subsequently, the income you receive. Any withdrawals in excess of 10% may be subject to a surrender charge. The taxable portion of each annuity distribution is subject to income taxation. If a taxpayer is younger than 59½ at the time of distribution, a 10% federal tax penalty will apply to the taxable portion of the distribution unless a penalty-tax exception applies.

Guarantees based on the financial strength and claims paying ability of Thrivent.

Holding an annuity inside a tax-qualified plan does not provide any additional tax benefits.

Thrivent and its financial professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance may be solicited.