A fixed annuity is a type of contract between an investor and a life insurance company. When you purchase an annuity, the insurance company will give you a fixed rate of return for a set number of years (the contract length) so you can calculate how your money will grow over the length of the annuity. The insurance company will then invest the money in low-risk portfolios, and once you opt into payments upon retirement, you’ll get a guaranteed monthly income for a certain number of years (or, in some cases, for life).

Types of fixed annuities

There are two main types of fixed annuities: immediate and deferred. The type you choose will depend on your age and how soon you need to access the money.

Immediate fixed annuities

The annuity begins payments as soon as the contract begins. This is a good option for an investor who is already at retirement age and wants to be able to access the money right away to help cover living expenses. On the downside, an immediate annuity will have a lower rate of return since the money hasn’t had time to sit and accumulate interest over time.

Deferred fixed annuities

Payments to the annuitant will begin at a later date. An investor can start a deferred annuity at any age—either with one lump sum of cash or by adding to it over time—and let the funds grow tax-deferred until they are ready to retire and start receiving disbursements.

How does a fixed annuity work?

A fixed annuity is a contract between an investor, called the annuitant, and a life insurance insurance company. The investor deposits a lump sum of cash into the annuity, and the insurance company guarantees that the investor will receive a certain amount of money, either as a lump sum or as monthly payments, for an agreed-upon time frame. You can set up a fixed annuity to make payments for a number of years or until you die. Having a guaranteed payment can help you budget more easily in retirement since you’ll know exactly how much the annuity will pay you each month.