If you plan to retire in 2026, managing your finances can feel confusing. With most company pensions gone, the main worry is no longer market ups and downs, but the risk of outliving your savings.
When searching for a safe place for your savings, you might come across Fixed-Rate Deferred (FRD) Annuities, also called Multi-Year Guaranteed Annuities (MYGAs). Insurance agents often describe them as risk-free, but some financial advisors caution that your money could be locked up for a while.
As a financial educator, I want to help you look beyond the marketing and focus on protecting your money. Let’s break down how Fixed-Rate Deferred Annuities actually work.
A Fixed-Rate Deferred Annuity is an agreement with a life insurance company. You pay them a lump sum or make payments over time, and they promise a fixed interest rate for a set period.
Unlike an immediate annuity, which starts paying you right away, a Fixed-Rate Deferred (FRD) annuity has two stages, depending on when you want to start receiving payments:
Accumulation Phase: In the first stage, which lasts several years, your initial deposit (the principal) stays in the contract and earns interest. You don’t pay taxes on this growth until you take the money out. This is known as tax deferral.
Annuitization (Distribution) Phase: At this point, you can turn your accumulated balance into regular, guaranteed income for life.
Consumer Note: You don’t have to turn your FRD contract into regular income payments. After the guaranteed interest period, you can move the money to a new contract, withdraw it, or leave it as is. Annuitizing means starting steady payouts, but the choice is yours.
Fixed-Rate Deferred Annuities vs. Bank CDs: The Operational. Some people refer to Fixed-Rate Deferred Annuities as “insurance certificates of deposit.” Both involve giving a lump sum for a guaranteed fixed return, but they work differently.
Traditional bank CDs are taxed every year, even if you reinvest the interest. Non-qualified FRD annuities grow tax-deferred, so you only pay income tax on gains when you start making withdrawals. With a Multi-Year Guaranteed Annuity (MYGA), you can benefit from a fixed interest rate that applies not only to your original investment but also to the interest that has accrued over time, allowing your savings to grow consistently without exposure to market risks, according to Amica.
An annuity contract is backed only by the insurance company’s ability to pay claims. Before you invest, make sure to check the company’s credit strength.
Look for insurance companies with a financial stability rating of A- (Excellent) or higher from agencies like AM Best or Standard & Poor’s.
No financial product can protect you from market drops for free. FRD annuities offer safety, but they also come with important restrictions.
Annuities are long-term commitments. Insurance companies apply surrender charges, usually lasting 5 to 10 years, to recover their initial costs and pay agents.
According to FINRA, there are no annual contribution limits for annuities themselves, but if you invest using a qualified plan such as an IRA, the plan’s limits will apply. The amount you can withdraw each year and any potential penalties will depend on the specific terms of your contract.
Annuity growth is taxed using a Last-In, First-Out (LIFO) method. The IRS treats your first withdrawals as taxable earnings, not as your original principal.
These earnings are taxed at your regular income rate, not the lower long-term capital gains rate. If you take out earnings before age 59½, the IRS adds a 10% federal penalty to your normal taxes.
To see how these factors work together, let’s look at a real-life example. Meet Robert and Linda, a couple preparing to retire who have a steady retirement income gap.
According to the Employee Benefit Research Institute’s 2024 Spending in Retirement Survey, about half of retirees spend less than $24,000 per year, but this example assumes retirees need $48,000 per year to cover basic living expenses. According to The Motley Fool, Social Security benefits can vary by state, with some retirees receiving higher payments depending on where they live. According to Fidelity, instead of placing their entire $600,000 in the market, the couple decides to put some of it into a Fixed-Rate Deferred Annuity, which can offer retirement peace of mind for those who invest at least $5,000. In their case, Social Security and a small pension together provide $36,000 per year, but they still face a $12,000 annual shortfall for essential expenses.
They chose a highly rated insurance company with a 5-year guarantee period. Their principal is protected from market ups and downs by a 0% market floor.
After the rate guarantee period, they convert part of the contract into periodic payments. The IRS applies an Exclusion Ratio, splitting each check into a tax-free return of principal and a taxable portion of earnings based on life expectancy:
Exclusion Ratio= Investment in the Contract \ Expected Return
By closing the $12,000 gap, they cover all their basic expenses. This gives them peace of mind, and they can invest their remaining liquid assets more aggressively to help protect against long-term inflation.
Generally, no. Fixed annuity payments stay the same over time. Unless you pay extra for a cost-of-living adjustment, a fixed payment that covers your expenses now will lose value as prices rise during a long retirement.
Variable and indexed annuities can charge over 3% in annual fees. Traditional FRD annuities usually do not have annual management fees. Instead, the insurer earns money from the difference between what they make on investments and the fixed rate they pay you.
If you die before starting income payments, the death benefit goes to your chosen beneficiary. According to FINRA, the beneficiary named in a deferred income annuity contract is entitled to receive any benefits due after the contract owner or annuitant passes away. Fixed-rate deferred annuities can provide a straightforward tool for managing certain financial risks, but they are not a comprehensive solution for all retirement planning needs. If you use them to cover a specific retirement gap, they can give you peace of mind. But if you need short-term access to your money, surrender charges and tax penalties can be a problem.
Absolute Predictability: Your principal is protected from market risk and grows with guaranteed, tax-deferred.
The Cost of Safety: Your money may be subject to surrender charges for 5 to 10 years.
Audit Your Distributor: Don’t buy based on generic sales pitches. Ask for a full list of fees, surrender schedules, and the carrier’s AM Best rating.
Before you commit your savings, do your homework. Use our comparison tool to see different accumulation scenarios side by side. Make sure your income plan fits your needs, not just an agent’s sales goals.