Fixed annuity.

In plain English

You give an insurance company a sum of money, and in return it credits your account a guaranteed interest rate for a set period. During the growth phase your balance rises predictably, with no exposure to the stock market. Later you can convert (annuitize) the balance into a stream of guaranteed payments, often for life. The tradeoff for that safety is a lower expected return than market investments and limited access to your money during the surrender period.

01Why it matters

If you want a portion of your retirement money to be predictable and protected from market swings, a fixed annuity gives certainty, but locking up cash at a low rate can cost you growth over a long retirement.

02The math, step by step

Suppose you put $50,000 into a fixed annuity that credits a guaranteed rate of, say, 4 percent in this example. You would earn that same percentage each year regardless of how the stock market performs. Actual credited rates are set by each insurer and change over time, so the contract you are quoted is what governs. After the surrender period ends, you can withdraw freely or convert the balance into monthly checks.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT