What Is a Fixed Index Annuity?

A fixed index annuity (FIA) is a type of annuity that protects your savings from market losses while allowing you to earn interest tied to a market index, like the S&P 500. You do not lose money if the market drops, and your principal grows tax-deferred over time.

Think of it as a middle ground between safety and opportunity: part fixed annuity, part market-linked growth. You get guaranteed protection with the potential for higher returns than certificates of deposits (CDs) or traditional fixed annuities.

How Does a Fixed Index Annuity Work?

Before deciding whether an FIA fits into your retirement plan, it is helpful to understand how it generates income.

Unlike stocks or mutual funds, your FIA does not invest directly in the market; it mirrors the movement of an index instead. Your FIA contract links to a market index, but you are not investing in the market itself. 

Each year (or crediting period), your annuity earns interest based on the performance of the index.

1. Market Rises → You receive a portion of the gain based on your contract’s terms.
2. Market Falls → Your balance stays protected, and no losses are applied.
3. Period Ends → Your earnings lock in and become part of your guaranteed value.

This balance helps protect long-term income goals while offering a way to keep pace with inflation, which is a common concern among retirees.

Indexing Methods: How Growth Is Calculated

Once you understand how FIAs protect your money, the next question is how they grow it.

Insurance companies use different formulas, known as indexing methods, to decide how much interest to credit to your account. These methods determine how your returns are calculated and how much of the index’s performance you actually receive. The three most common are:

There are three popular indexing methods:

How Are Gains Limited?

While FIAs provide an opportunity for index-linked growth, insurance companies use certain mechanisms to control the amount of interest credited. These limitations are essential for ensuring that the insurer can guarantee principal protection while still providing market participation.

Factors That Can Impact Index Rate

Participation rate.

The participation rate is the percentage of the gain in the stock index you will receive on your annuity. For example, if the participation rate is 80% and the index gains 10%, the annuity would be credited with 80% of the 10% gain, or 8%.

Spread/Margin/Asset Fee

Some fixed index annuities use this in place of or in addition to a participation rate. This percentage is subtracted from any gain in the index. If the fee is 3% and the index gains 10%, then the annuity would gain 7%.

Interest Rate Caps.

Some indexed annuities put an upper limit on your return. So if the index gained 10% and your cap was 7%, then your gain would be 7%

Fees, Flexibility and Features

Like all financial products, fixed index annuities (FIAs) include costs and contract rules that shape how your money grows and when you can access it. Understanding these details upfront helps you make confident, informed decisions about whether an FIA fits your goals.

Some features, such as lifetime income riders or enhanced withdrawal options, can add long-term security. Others affect how quickly your annuity balance grows. The key is knowing which features you will actually use and which may not be worth the added expense.

Q: Are there annual fees?
Most FIAs do not charge annual fees unless you add optional riders for income or long-term care. Rider costs usually range from 0.25% to 1.75% of your account value.

Q: Can I access my money early?
Most contracts allow up to 10% annual withdrawals after the first year without penalty. Charges may apply if you withdraw more than that during the surrender period, which typically lasts seven to 10 years.

Q: How flexible are FIAs overall?
FIAs allow you to choose your index, crediting method and optional riders, providing customizable growth with built-in safety and predictable access.

Example: How an FIA Supports Real Retirement Goals

Numbers and terms are helpful, but seeing how an FIA works in a real-life scenario makes the benefits clear. This is how someone approaching retirement can use an FIA to create peace of mind and a predictable income.

Hallie, age 65, has $100,000 to invest and wants income to supplement Social Security. She does not want full market exposure but hopes to earn more than a certificate of deposit (CD).

A fixed index annuity gives her:

• Steady growth potential
• Principal protection
• A guaranteed minimum return

Hallie’s contract credits interest when her selected index rises, but she never loses value when it falls. It is a low-stress way to add predictable income to her retirement plan.

Is a Fixed Index Annuity Right for You?

Every retirement plan has unique goals, but thankfully, FIAs are not a one-size-fits-all solution. They can be an excellent fit for those who want to balance security with controlled growth, but they work best when aligned with your income timeline and risk tolerance.

If you prefer predictability and protection but still want your money to work for you, an FIA could provide the right balance.

If you are thinking about buying a fixed index annuity, make sure you understand how growth is credited to your account. You may have a minimum guaranteed return, but your upside will be capped, as well.

Brandon Renfro, Ph.D., CFP®, RICP®, EACo-Owner of Belonging Wealth Management

As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

Next Steps

Learning about FIAs is just the beginning. The next step is to determine how your financial goals align with your annuity. 

Annuity.org’s licensed specialists and tools can help you compare options so you can determine what is the best choice for your retirement plan.

Explore your options with confidence:

• Access Today’s Best Fixed Index Annuity Rates
• Compare the Top Annuity Companies of 2025
• Use Our Annuity Calculator to Estimate Growth

Each of these tools helps you understand how a fixed index annuity can protect your savings while keeping your retirement plan on track.