Last updated: April 4, 2026  |  Author: Elizabeth Prescott  |  Reviewed by: AnnuityJournal Editorial Team

Can You Lose Money in a Fixed Annuity? The Honest Answer

If you’re considering a fixed annuity for your retirement savings, you’ve probably asked yourself: “Can I actually lose money with this thing?” It’s a fair question, especially after watching the stock market swing wildly in recent years.

The short answer is no, your principal is contractually guaranteed. A fixed annuity cannot lose money due to stock market declines, rising interest rates, or economic downturns. Your balance only goes up by the guaranteed rate in your contract.

But the full answer is more nuanced. While you won’t lose principal from market volatility, there are a handful of scenarios where you could receive less than you put in, or watch your money lose purchasing power. Let’s walk through every one of them so you know exactly what you’re signing up for.

How Do Fixed Annuity Guarantees Actually Work?

A fixed annuity guarantee is backed by the insurance company’s general account, not a separate investment portfolio tied to the stock market. This is a critical distinction.

When you buy a fixed annuity, your money goes into the insurer’s general account alongside billions of dollars from other policyholders. The insurance company invests that pool conservatively, mostly in investment-grade bonds, commercial mortgages, and other stable assets. Your guaranteed rate is written into your contract, and the insurer is legally obligated to pay it regardless of what happens in the broader market.

This is fundamentally different from a variable annuity, where your money sits in a separate account invested in mutual fund-like subaccounts. With a variable annuity, your balance fluctuates daily based on market performance. With a fixed annuity, it does not.

Consider this real-world example: Margaret, age 61, invested $200,000 in a 5-year MYGA at 5.50% in January 2024. Even if the S&P 500 dropped 40% tomorrow, her contract would still guarantee that 5.50% rate for all five years. At maturity, she is guaranteed to have approximately $261,477, no matter what the stock market does.

What Are the Real Risks of Owning a Fixed Annuity?

While your principal is safe from market losses, there are five specific scenarios where a fixed annuity could cost you money. None of them involve the stock market, but all of them are worth understanding before you sign a contract.

How Much Can Surrender Charges Cost You?

Surrender charges are the most common way people lose money in a fixed annuity. These are penalties the insurance company charges when you withdraw more than your annual free amount during the surrender period.

A typical MYGA surrender schedule might look like this: 7% in year one, 6% in year two, 5% in year three, declining to 0% after year five or seven. If you put $100,000 into a 5-year MYGA and needed all your money back after 18 months, you could face a 6% penalty, costing you $6,000.

Here’s the good news: most fixed annuities allow you to withdraw up to 10% of your account value each year without any surrender charge. So if Robert, age 64, has $150,000 in a MYGA, he can pull out $15,000 per year with no penalty. That covers many unexpected expenses without triggering charges.

The takeaway: only invest money you genuinely won’t need for the full term. If you’re not sure, choose a shorter term (3 years instead of 7) even if the rate is slightly lower.

What Is a Market Value Adjustment and How Can It Reduce Your Payout?

A market value adjustment (MVA) is a lesser-known feature built into some fixed annuity contracts. It adjusts your surrender value up or down based on the interest rate environment at the time you withdraw.

Here’s how it works in plain English: if interest rates have risen since you purchased your annuity and you surrender early, the MVA reduces your payout. If rates have dropped, the MVA actually increases your payout. The logic mirrors how bond prices move inversely to interest rates.

For example: Linda, age 58, bought a 7-year MYGA in 2023 when rates were 4.75%. By 2025, new MYGAs were paying 5.65%. If Linda surrendered early, the MVA would reduce her value because the insurer’s underlying bonds lost value in that rising-rate environment. The reduction could be 2-5% on top of any surrender charge.

Not all fixed annuities have MVAs. If this concerns you, specifically ask for a “non-MVA” product. Many of the top-rated MYGAs available today do not include market value adjustments.

What Happens If Your Insurance Company Goes Bankrupt?

This is the risk that keeps people up at night, but it’s also the rarest one on the list. Insurance company failures are exceptionally uncommon, especially among the large, well-capitalized carriers that issue most fixed annuities.

Even when an insurer does fail, your money doesn’t just vanish. Every state has a guaranty association that steps in to protect policyholders. In most states, the coverage limit is $250,000 per owner, per insurance company. Some states offer higher limits. You can check your state’s specific coverage at the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) website.

In practice, when an insurer runs into trouble, another stronger company typically acquires the troubled company’s annuity book. Policyholders often barely notice the transition. The last major life insurer failure (Executive Life of New York in 1991) ultimately paid policyholders roughly 90 cents on the dollar, and guaranty association protections have strengthened significantly since then.

For more detail on how these safety nets work, read our full guide on whether are annuities safe.

Why Do AM Best Ratings Matter When Choosing a Fixed Annuity?

Since your annuity guarantee is only as strong as the company behind it, the financial strength of your insurer matters enormously. AM Best is the gold standard rating agency for insurance companies.

Here’s how the top carriers stack up:

The COMDEX score ranks an insurer against all other rated companies on a scale of 1 to 100. A score of 90+ means the carrier outperforms at least 90% of its peers across all major rating agencies. Stick with carriers rated A or better by AM Best, and you’re dealing with companies that have weathered every recession, financial crisis, and market crash in modern history.

For a deeper comparison, check out our list of top-rated carriers for 2026.

Fixed Annuity vs. Stock Market: How Does the Risk Compare?

The easiest way to understand fixed annuity safety is to compare it directly against stock market investments during the worst downturns.

During the 2008 financial crisis, someone with $300,000 in an S&P 500 index fund saw their balance drop to roughly $184,500. A person with the same amount in a fixed annuity earning 4.25% saw their balance grow to about $312,750. That’s a difference of over $128,000 in a single year.

For retirees who need predictable income and can’t afford to wait 5-7 years for a market recovery, fixed annuities provide something the stock market simply cannot: a contractual guarantee that your balance never goes backward.

Can Inflation Erode Your Fixed Annuity Returns?

Yes, and this is the most overlooked risk of fixed annuities. Your money is safe in nominal terms, but inflation can quietly eat away at what that money actually buys.

If you lock in a 5-year MYGA at 5.50% and inflation averages 3.5% over that period, your real (inflation-adjusted) return is only about 2%. You haven’t lost any dollars, but each dollar buys a little less than it did when you started.

To put it in practical terms: Tom, age 66, invested $250,000 in a 5-year MYGA at 5.50% in 2024. At maturity in 2029, he’ll have approximately $326,845. But if inflation averaged 3.5% annually, that $326,845 only has the purchasing power of roughly $274,800 in 2024 dollars. He still made money, but not as much as the headline rate suggests.

How to manage this: don’t put 100% of your retirement savings into fixed annuities. Most financial planners recommend allocating 30-50% of your portfolio to guaranteed products like fixed annuities, while keeping the rest in diversified investments that have historically outpaced inflation over time.

What About the 10% IRS Penalty for Early Withdrawals?

If you’re under age 59½ and withdraw money from a non-qualified annuity, you’ll owe a 10% IRS penalty on the earnings portion of your withdrawal, plus ordinary income tax. For qualified annuities (funded with IRA or 401(k) money), the 10% penalty applies to the entire withdrawal amount.

This isn’t unique to annuities. The same 10% early withdrawal penalty applies to IRAs, 401(k)s, and most other tax-advantaged retirement accounts. But it’s worth mentioning because it can catch younger buyers off guard.

The simple fix: if you’re under 59½, make sure you have adequate liquid savings outside your annuity before committing. The fixed annuity should be money you’re confident you won’t touch until retirement.

What Are Current Fixed Annuity Rates?

As of April 2026, fixed annuity rates remain near multi-year highs. According to AnnuityRateWatch data, top rates include:

• 3-year MYGA: Up to 5.45%
• 5-year MYGA: Up to 5.65%
• 7-year MYGA: Up to 5.60%

These rates are guaranteed for the full term, meaning you know exactly what you’ll earn from day one. Compare that to a high-yield savings account (currently averaging 4.0-4.5%) that can drop its rate at any time without notice.

To see the latest rates from top-rated carriers, compare fixed annuity options or visit our best 5-year annuity rates page.

How Can You Protect Yourself When Buying a Fixed Annuity?

Knowing the risks is half the battle. Here are six practical steps to make sure your fixed annuity investment stays safe:

1. Buy from A-rated or better carriers only. Check the insurer’s AM Best rating before signing anything. An A+ or A++ rating means the company has a long track record of financial strength.

2. Stay within your state’s guaranty association limits. If you’re investing more than $250,000, split it across two or more insurance companies. This way, each contract falls within the guaranty association coverage limit.

3. Choose a term you can commit to. If you think you might need the money in three years, don’t buy a 7-year MYGA for the slightly higher rate. The surrender charges aren’t worth it.

4. Use the 10% annual free withdrawal wisely. Most contracts let you take 10% per year without penalty. Factor this into your liquidity planning before you buy.

5. Keep some money outside the annuity. Maintain 6-12 months of living expenses in a liquid savings or money market account. This prevents you from ever having to surrender your annuity early.

6. Read the MVA provision carefully. If your contract includes a market value adjustment, understand exactly how it’s calculated. Or simply choose a product without one.

Frequently Asked Questions

Can a fixed annuity lose money in a stock market crash?

No. Fixed annuities are not invested in the stock market. Your principal and interest rate are contractually guaranteed by the insurance company. During the 2008 financial crisis, the S&P 500 lost 38.5%, while fixed annuities lost nothing. Your balance simply continues growing at the guaranteed rate regardless of market conditions.

What is the safest type of annuity?

A Multi-Year Guaranteed Annuity (MYGA) from an A-rated or better insurance carrier is widely considered the safest type. MYGAs offer a fixed, guaranteed interest rate for a specific term with no market exposure. They function similarly to a bank CD but are backed by the insurance company’s general account instead of FDIC insurance.

Are fixed annuities safer than bank CDs?

Both are considered very safe, but they’re protected differently. CDs are covered by FDIC insurance (up to $250,000 per depositor, per bank). Fixed annuities are covered by state guaranty associations (typically $250,000 per owner, per insurer). The protection mechanisms differ, but the coverage amounts are comparable. Fixed annuities often pay higher rates than CDs for similar terms.

How much of my retirement savings should I put in a fixed annuity?

Most financial planners suggest allocating 30-50% of retirement savings to guaranteed products like fixed annuities, depending on your age, income needs, and risk tolerance. The remaining 50-70% should stay in diversified investments for growth. A 63-year-old with $400,000, for example, might put $150,000 to $200,000 in fixed annuities and keep the rest in a balanced portfolio.

What happens to my fixed annuity when I die?

Your named beneficiary receives the remaining value of the annuity, typically the account balance plus any accumulated interest. There is no surrender charge applied at death in most contracts. The payout to beneficiaries is generally processed within 30-60 days of submitting a death claim. Check your specific contract for details on death benefit provisions.