What Should the Return Be on a Fixed Annuity?

There is no single correct return for every fixed annuity.

The answer depends entirely on the type of fixed annuity you are talking about.

A MYGA provides a guaranteed interest rate.

A lifetime income annuity provides a contractual payout based heavily on life expectancy.

A Fixed Index Annuity provides potential indexed interest that is not guaranteed.

Those are three very different things.

Key Takeaways

• There is no universal return for all fixed annuities.
• MYGAs provide a guaranteed interest rate for a specified term.
• Lifetime income returns depend heavily on how long you live.
• Fixed Index Annuity returns are not guaranteed.
• FIAs were designed to compete with CD-type returns, not stock market returns.
• Market-growth projections should not be treated as contractual guarantees.

Start by Identifying the Type of Fixed Annuity

The fixed annuity category includes several products.

Examples include:

• Single Premium Immediate Annuities
• Deferred Income Annuities
• QLACs
• Income Riders
• MYGAs
• Fixed Index Annuities

Each needs to be evaluated differently.

What Is the Return on a Lifetime Income Annuity?

There is no way to know the final return on a lifetime income annuity in advance.

Why?

Because the contract pays based on your lifetime.

You would need to know exactly how long you are going to live before calculating the ultimate return.

That is why lifetime income should not be evaluated like a traditional fixed-rate investment.

Life Expectancy Drives Lifetime Income

Lifetime income is primarily based on life expectancy.

Generally, the older you are when payments begin, the higher the initial payment.

The insurance company expects to make payments for a shorter period.

If you live much longer than expected, the insurance company continues paying according to the contract.

What Is the Return on a MYGA?

A MYGA is the easiest fixed annuity to evaluate from a return standpoint.

A Multi-Year Guarantee Annuity provides a guaranteed interest rate for a specific period.

For example, if you purchase a five-year MYGA, the contract specifies the guaranteed rate for those five years.

That is the return you can evaluate contractually.

Why MYGAs Are Straightforward

With a MYGA, you know:

• the interest rate
• the term
• the surrender period
• the liquidity provisions

There is no need to rely on future market projections.

The contract tells you the guaranteed rate.

What About Fixed Index Annuities?

Fixed Index Annuities work differently.

Potential interest is calculated using an external index and the contract's crediting method.

That may involve:

• caps
• spreads
• participation rates
• other provisions

The future indexed return is not guaranteed.

FIAs Were Not Designed for Stock Market Returns

Fixed Index Annuities were introduced to compete with CD-type returns.

They are not direct stock market investments.

They are not securities.

If someone tells you an FIA should consistently produce high single-digit or double-digit market-like returns, ask whether that number is contractually guaranteed.

If it is not, do not treat it as a guaranteed return.

Why "Market Upside With No Downside" Can Mislead

The phrase sounds attractive because it suggests stock market growth without stock market risk.

But an FIA does not provide unrestricted market participation.

You are not directly invested in the index.

The potential interest is limited by the contract's crediting methodology.

Principal protection and market growth are not the same thing.

What Should a Fixed Index Annuity Earn?

There is no guaranteed future indexed return.

That is the key point.

The product can earn indexed interest, but the exact amount varies based on:

• index performance
• cap
• spread
• participation rate
• other contract terms

Those numbers may also change after the initial period according to the contract.

What If Someone Projects 7% to 13%?

Ask whether the insurance company guarantees it.

If the answer is no, it is not a contractual return.

Historical or back-tested illustrations may be interesting, but they should not be the basis of a retirement guarantee.

Do Not Compare Hypothetical Returns With Guaranteed Rates

A guaranteed MYGA rate and a hypothetical FIA return are not equivalent.

One is contractual.

The other depends on future outcomes.

If guaranteed accumulation is your goal, compare contractual fixed rates with other contractual fixed rates.

Annuities Are Transfer-of-Risk Products

Annuities are designed to transfer specific risks to insurance companies.

Those risks can include:

• principal risk
• longevity risk
• income risk
• certain legacy needs
• certain long-term care needs

That is different from investing primarily for market growth.

Start With the Objective

Ask:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

If you want a known interest rate, compare MYGAs.

If you want lifetime income, compare lifetime income guarantees.

If you want market growth, use market-based investments.

Where to Compare Fixed Annuity Returns

Use our annuity calculators to compare current contractual guarantees from multiple insurance companies.

For MYGAs, compare guaranteed rates by state and term. For lifetime income, compare contractual payouts. Do not build the decision around hypothetical indexed returns.

The Bottom Line

The return on a fixed annuity depends on the type of annuity.

With a MYGA, the return is a contractually guaranteed interest rate.

With lifetime income annuities, the ultimate return depends on how long you live.

With a Fixed Index Annuity, future indexed interest is not guaranteed.

The key is to compare guaranteed numbers with guaranteed numbers and avoid treating hypothetical growth projections as contractual returns.

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