Fixed Annuity Payouts Are Spiking: Is it Time to Lock In?
With interest rates near two-decade highs, guaranteed income is looking attractive again. Here are 4 ways to play the rate spike.
For savers, the sharp spike in interest rates has a silver lining: higher annuity payouts and larger risk-free guaranteed income streams.
When interest rates rise, annuity yields typically follow; insurers earn more on bonds they buy with customer premiums, so they can pass along higher rates to new annuity buyers.
An annuity is a contract between you and an insurance company that converts savings into guaranteed income — for a set period or for life.
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With borrowing costs rising from the Federal Reserve’s benchmark short-term rate to the 10-year Treasury note, annuities are back in the spotlight. Pre-retirees and retirees seeking a guaranteed income stream beyond Social Security can take advantage of the rate spike and lock in higher annuity rates.
With equity markets near record highs and interest rates surging, U.S. annuity sales rose 2.2% in the second quarter to $121.2 billion, according to LIMRA. Sales in the first six months of 2026 totaled $228.7 billion, a new first-half record.
Money parked in annuities, of course, reduces market exposure and provides protection against a downturn in stocks.
There are many types of annuities. But we'll focus on two common types that offer fixed payouts or lifetime income and are simple to understand. Examples include:
Multi-year guaranteed annuity (MYGA). This is a "fixed annuity" that locks in a guaranteed interest rate for a set term — typically three to 10 years — with tax-deferred growth and no market risk. Like a certificate of deposit (CD), this annuity is used for accumulation. You give the insurer a lump sum for, say, five years, earn a fixed annual rate of return and get your principal back at the end of the contract. For example, if you put $100,000 in a five-year MYGA yielding 6.55%, you will earn $6,550 each year and get your principal back five years later at the end of the contract.
Single Premium Immediate Annuity (SPIA). Often called "immediate annuities," this type of annuity is similar to an old-fashioned pension as it turns a lump sum into guaranteed income for life. You give an insurer a lump sum today, and the company writes you a monthly check for the rest of your life or a fixed number of years starting immediately.
With SPIAs, be aware that once you turn over your money to an insurer in a "life only" SPIA and they start providing a guaranteed income stream, the money you forked over is gone. For this reason, many buyers purchase SPIAs with a "period certain" or cash refund rider so their heirs get the remaining balance if they die early.
SPIA math is simple. To determine the monthly income an annuity will pay out, multiply the premium (or lump-sum payment) by the annual payout rate, then divide by 12. Using a $100,000 premium and a 5% payout rate, the monthly income would be $416.67. Monthly income = $100,000 x 5% / 12 = $416.67. At a 5.25% payout rate, the monthly income climbs to $437.50.
Why are annuities attractive now?
What makes these annuities attractive now is the high income they generate because of the spike in rates.
As of October 1, 2026, the best fixed annuity rate for a three-year annuity is 6.10%, five-year annuities pay 6.55%, seven-year annuities earn 6.95%, and a 10-year annuity pays 6.35%, according to My Annuity Store.
With Wall Street penciling in another full percentage point of Federal Reserve rate hikes through the end of 2027, potentially taking the Fed’s overnight bank lending rate from 4% to 5%, investors must weigh whether now is the time to lock in higher rates.
From an income opportunity standpoint, those yields are attractive, and investors or retirees should take advantage of them, says David Lau, founder and CEO of DPL Financial Partners, an online platform that offers commission-free annuities. "It’s a terrific time to lock in these rates," says Lau. A perk of owning a MYGA or fixed annuity is that most insurers let you withdraw up to 10% of your account value per year without a surrender charge, according to AnnuityExpert.com.
Despite forecasts of higher rates in the months and year ahead, it's difficult to predict the direction of rates. Timing interest rates is as difficult as accurately timing when to jump in and out of the stock market. Waiting for a better entry point, of course, could always net you an even higher rate on a new annuity. But it's not a guarantee. "You can't get paralyzed by hoping or wondering whether you can get maybe a little better rate if you wait," says Lau.
Ed Massaro, CEO of Knighthead Life, an insurer that sells annuities, says savers shouldn't place too much emphasis on where rates are headed next when weighing whether to purchase an annuity.
"The right question isn't whether rates are at a peak; it's whether today's rates get you enough income to meet your retirement goals," says Massaro.
Options for annuity buyers as rates rise
Since nobody knows where rates will go from here, here are four options for an income-oriented pre-retiree, retiree, or conservative saver to consider.
1. Lock in today’s rates. With the 10-year Treasury hovering at around a 19-year high of 5.25%, locking in today's annuity rates that range from 6% to nearly 7% makes sense for a saver who wants a guaranteed return today rather than betting on a higher rate in the future.
The sweet spot for fixed income annuities or MYGAs is a five-year annuity with yields as high as 6.55% and a seven-year product that offers a top yield of 6.95%. "As long as you have the liquidity (e.g., available cash to meet your spending needs), lock in those longer-duration annuities," says Lau. Since the highest current yield on a 10-year annuity is just 6.25%, Lau sees no reason to lock money up in an annuity for a decade.
2. Build an annuity ladder. One way to lock in today's elevated rates while minimizing interest rate risk is to build an annuity ladder that invests in a number of annuities spread across different maturity dates, says Steve Azoury, owner of Azoury Financial.
This strategy is similar to building a CD ladder but benefits from tax-deferred growth. Given that annuity rates offered by insurers currently top out at around seven years, you could spread money equally among annuities that offer fixed rates for one, two, three, four, five, six and seven years. So, if rates keep climbing, you can roll over an expiring annuity into a higher-yielding one, says Azoury. On the flip side, if rates dip for some reason, you will have locked in today's higher rates.
Before committing any money to an annuity, Azoury says you should review your retirement goals and objectives and decide how big a weighting of annuities you want in your retirement portfolio.
3. Wait and see. If you're willing to bet on rates moving higher, you can wait to buy an annuity to take advantage of higher yields in the future. The risk is missing out on higher yields now and losing purchasing power on cash sitting in lower-yielding investments, says Lau. And if the money you plan on deploying in an annuity is sitting in a risk asset like a stock mutual fund, you risk losing money if the stock market goes down. "That's the biggest risk, especially those within five years of retirement," says Lau. Losses in the stock market close to retirement can be hard to overcome (an effect known as "sequence of returns risk") and can deplete retirement savings faster than planned.
4. Buy now and buy later. Another strategy is to hedge your bets by putting a portion of your money into an annuity at today's rates and adding more later to hedge against future rate volatility. "Average in,” says Massaro. "Don’t try to pick the top."
Whatever strategy you choose, make sure you shop around for the highest rates available from highly rated insurers. An insurer with an A or higher credit rating is a less risky bet than going for a higher rate offered by a lower-rated insurance company.
The bottom line: today's annuity rates are plump enough to generate a solid income stream.
"It’s a good time to participate," says Massaro.
Weigh the downsides
Before you lock in an annuity, consider the drawbacks of fixed annuities.
Inflation: The most serious threat to a long-term annuity contract is inflation. For example, consider the buying power of the 5-year MYGA example above, with $100,000 invested and a 6.55% interest rate. At the end of five years, the insurance company will hand you a lump sum of $137,331, but its real purchasing power, adjusted for inflation, is $116,189. You've beaten inflation and grown your real wealth by roughly $16,189, but your effective "real" rate of return after inflation is about 3.05% per year.
Penalties for early liquidation: Steep surrender charges, often up to 10%, apply if you liquidate your MYGA early. (SPIAs are similar to pensions and cannot be cashed out.)
Taxed as ordinary income: Your annuity will enjoy tax-deferred growth, but gains will be taxed at higher ordinary-income rates rather than capital gains rates.
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