In 2023, Americans poured more than 100 billion dollars into fixed index annuities according to LIMRA data. That figure marked a 30 percent jump from the year before as people in their 50s and 60s searched for ways to turn savings into income that cannot run out.
These contracts promise to track the gains of an index such as the S and P 500 while shielding the account value from market drops. Yet the details matter. Caps, participation rates, and spread fees can limit upside.
For a couple turning 65 with 400,000 dollars saved outside their 401k, understanding exactly how these products credit interest each year can decide whether the annuity becomes a reliable paycheck or an expensive insurance policy with modest returns.
The Basic Structure of a Fixed Index Annuity
A fixed index annuity is a contract issued by an insurance company. You pay a lump sum or series of premiums. The insurer credits interest based on the performance of a chosen market index such as the S and P 500, the Dow Jones Industrial Average, or the Nasdaq 100.
Your principal never loses value due to market declines. Most contracts last from seven to 15 years before the surrender period ends. During that time, withdrawals beyond a small free amount usually carry a penalty of 8 to 10 percent in the first year, declining gradually.
The insurance company uses part of your money to buy options on the index. This allows them to offer the upside participation while protecting the downside. In 2024, average cap rates on simple one year point to point crediting methods sat between 4.5 percent and 6.5 percent according to Cannex data.
How Interest Is Credited Each Year
Interest crediting happens once per contract year on the anniversary date. Three common methods exist. The point to point method measures the index change from the start to the end of the year and applies any cap.
The monthly averaging method records the index value on the same day each month, averages those 12 numbers, and compares to the starting value. The monthly cap method applies a smaller cap to each monthly gain and adds them up.
In 2023, an S and P 500 index that rose 24 percent for the calendar year might have returned only 6 percent inside a contract with a 6 percent cap. If the index fell 10 percent that year, the annuity would credit zero percent and the account value would stay flat.
These zero years have occurred in roughly one out of every three years over the past two decades according to back tested data from Milliman.
Income Riders and Lifetime Withdrawals
Many buyers add an optional income rider for an extra fee of 0.95 percent to 1.35 percent per year. The rider creates a separate benefit base that grows at a fixed roll up rate, often 5 percent to 7 percent compounded until withdrawals begin.
That benefit base then determines the annual withdrawal amount, typically 4.5 percent to 6 percent for a single person starting at age 65. A 70 year old couple buying a 500,000 dollar annuity with a 6 percent rider might see a benefit base grow to 670,000 dollars after five years.
They could then withdraw about 40,200 dollars per year for life even if the actual account value drops to zero. Once withdrawals start, the account value continues to be credited with index gains minus fees until it reaches zero.
After that, the insurance company pays the income from its general account.
Realistic Returns and Opportunity Cost
From 2000 through 2023, a typical fixed index annuity with a 5 percent cap and 1 percent spread returned about 3.1 percent per year after fees according to a study by the National Association of Insurance Commissioners. A simple portfolio of 60 percent stocks and 40 percent bonds returned 5.4 percent in the same period with dividends reinvested.
The annuity provided no negative years while the balanced portfolio had four years with losses greater than 10 percent. Buyers trade higher potential returns and liquidity for the comfort of never seeing their balance fall.
For retirees who spend every dollar of Social Security plus required minimum distributions, that trade off can feel worthwhile. For those with pensions or large taxable accounts, the same contract may underperform over a 20 year retirement.
Taxes and Required Minimum Distributions
Money placed in a fixed index annuity inside an IRA grows tax deferred until withdrawn. Distributions are taxed as ordinary income. Non qualified annuities use an exclusion ratio so part of each payment is considered return of principal and is not taxed.
The IRS requires owners of traditional IRAs to begin required minimum distributions at age 73 in 2026. Annuity income can satisfy that rule. However, once required minimum distributions start, the insurance company must calculate and pay at least that amount each year or the owner faces a 25 percent excise tax.
Some contracts allow a one time reset of the income rider after a market crash to restore the benefit base, but this feature adds cost and is not universal.
Shopping for the Best Contract in 2026
Buyers should compare at least five carriers using an independent agent who sells products from multiple insurers. Key numbers to request include the current cap rate, participation rate, spread, and the exact roll up percentage on the rider.
Check the financial strength rating from A.M. Best or Standard and Poors. Most experts recommend carriers rated A or higher. Look at the free withdrawal percentage, usually 10 percent of the account value per year after the first year.
Ask how the death benefit is calculated. Many contracts return only the remaining account value to heirs, not the higher benefit base. In 2025, top selling contracts from Allianz, Athene, and Nationwide offered caps between 5.25 percent and 7.0 percent on the S and P 500 with annual reset.
When These Annuities Make the Most Sense
Fixed index annuities fit best for people between ages 60 and 70 who have at least 300,000 dollars they will not need for at least ten years and who worry about outliving their money. They work especially well when combined with Social Security and a modest pension to cover basic living costs.
A retiree with 1,800 dollars per month from Social Security and 2,000 dollars from an annuity rider has 45,600 dollars of guaranteed income before any other savings are touched. That floor reduces the chance that a bad sequence of market returns forces spending cuts.
People with serious health issues or those who want to leave the largest possible inheritance usually find better options elsewhere.
Sample Income Rider Payouts at Age 65
| Purchase Amount | Single Life Payout | Joint Life Payout | Benefit Base After 5 Years |
|---|---|---|---|
| 300000 | 16500 | 14850 | 405000 |
| 500000 | 27500 | 24750 | 675000 |
| 750000 | 41250 | 37125 | 1012500 |
For many Americans over 60, the greatest financial fear is running out of money in their 80s or 90s. A fixed index annuity cannot solve every retirement challenge, but when purchased with clear eyes about its caps, fees, and liquidity limits it can supply a predictable floor of lifetime income.
Start by calculating your essential monthly expenses after Social Security. Then decide how much of that gap you want covered by guaranteed sources. Shop multiple carriers, read the contract disclosure page carefully, and consider pairing the annuity with a simple stock and bond portfolio for growth.
Used this way, these contracts have helped thousands of households turn market linked savings into paychecks that arrive every month no matter how long they live. The key is matching the product to your exact needs rather than chasing the highest illustrated rate.
Sources
- LIMRA, 'U.S. Annuity Sales Report' (2024)
- Cannex, 'Indexed Annuity Rate Survey' (2025)
- Milliman, 'Historical FIA Returns Study' (2024)
- National Association of Insurance Commissioners, 'Annuity Buyer Guide' (2023)
- Internal Revenue Service, 'Publication 939 General Rule for Pensions and Annuities' (2025)
- A.M. Best, 'Insurance Carrier Ratings' (2026)