Not all annuities are alike. Learn how MYGA, Indexed, and SPIA annuities work—and when each one fits into a retirement income strategy.
What Is an Annuity and Why Is It Misunderstood?
Annuities are insurance products that turn your savings into guaranteed income. They're designed to manage retirement risks—like living too long or withdrawing too much too fast.
But annuities often spark confusion and controversy. Why? Because people expect stock-like returns from bond-like products. To avoid costly mistakes, you must understand what each type of annuity is (and isn’t).
1. Fixed Annuity – MYGA (Multi-Year Guaranteed Annuity)
MYGA is the simplest annuity type. Think of it like a CD with tax deferral:
- 💵 Fixed interest for a set number of years (e.g., 4.5% for 5 years)
- 🛡️ Principal is 100% guaranteed
- 🧾 Best for conservative investors seeking predictable returns
Use Case: You’re near retirement and want to lock in a fixed rate without market risk.
2. Indexed Annuity – Often Misunderstood
Indexed Annuities offer market-linked growth—but with principal protection. They’re often sold as “market alternatives,” but:
- 📊 They track market indexes like the S&P 500
- 📉 They include cap rates (e.g., 9%) and floors (e.g., 0%)
- 🧠 They do not own stocks—returns are simulated based on formulas
Case Example: $100,000 Indexed Annuity for 10 Years
- 📈 Worst-case: No growth, but no loss
- 📉 Best-case: 5–7% annualized return, depending on cap and participation
- 🧾 Average result: Capital preservation + moderate upside
Key Insight: Indexed annuities are closer to bonds than stocks. They belong in the fixed-income portion of your portfolio—not as a growth engine.
3. Lifetime Income Annuity – SPIA
Single Premium Immediate Annuities (SPIA) are pure income insurance. You give the insurer a lump sum and start receiving monthly payments right away—typically for life.
- ✅ Shields you from longevity risk
- ✅ Provides stable monthly income regardless of market
- ❌ Irrevocable (no principal access once income starts)
Think of SPIAs as: “Personal pensions” you create for essential living expenses.
4. Variable Annuities – High Risk, High Fees
Variable Annuities allow you to invest in sub-accounts (like mutual funds). They offer upside potential—but with:
- 💸 High annual fees (2–3% typical)
- 📉 Investment loss risk (your account value fluctuates)
- 🧠 Only suitable for experienced investors
Some offer income riders for guaranteed withdrawals—but fees stack up fast.
When Is an Annuity Right for You?
✅ If you're 100% in stocks, annuities likely aren’t for you. But if your portfolio includes bonds, you can use annuities to replace some of that fixed-income portion with guaranteed alternatives.
| Type | Best For | Growth Potential | Principal Protection | Liquidity |
|---|---|---|---|---|
| MYGA | Capital preservation | Low (fixed rate) | ✅ Yes | ❌ Locked during term |
| Indexed Annuity | Moderate upside w/ protection | Moderate (capped) | ✅ Yes | ❌ Surrender charges apply |
| SPIA | Lifelong guaranteed income | None (income only) | ✅ Yes | ❌ Irrevocable |
| Variable Annuity | Growth with guarantees (optional) | High (market-based) | ❌ No | ❌ Fees + volatility |
Final Thoughts
- 📌 Not all annuities are the same—each serves a different goal
- 📌 Don’t buy an annuity for market returns—buy it for income stability or capital protection
- 📌 Use annuities as part of a diversified retirement plan, not in isolation
