What average annuity returns really look like

If an agent or a brochure just quoted you a number — “earn up to 7%” — and you want to know whether it’s real before moving a large sum, you’re asking the right question. The honest answer is that there is no single average annuity return. The figure depends entirely on which of four products you mean, and one of those “numbers” isn’t a rate of return at all.

This guide routes you to what matters for your situation:

• Comparing annuity types before you buy? The returns-by-type breakdown below is your starting point.
• Retired or near it, weighing guaranteed income? The payout-rate section is the one to read closely.
• Skeptical of a sales pitch? The fees and mistakes sections show what quietly shrinks the number.

For the full mechanics, here’s what an annuity is and how it works. Below, we separate the four types, give the realistic net range for each, and name exactly what subtracts from it — every figure tied to a named source.

ℹ️ Financial Disclaimer: This article is for educational purposes only and is not personalized investment, insurance, or tax advice. Annuities are insurance products; their guarantees depend on the issuing company’s claims-paying ability and are not FDIC-insured. Rates and figures are current as of the date shown and change frequently. Consult a fiduciary financial advisor and a CPA or tax professional before purchasing an annuity or acting on anything here.

How annuities actually earn a return

“Annuity” is an umbrella over four products, and each one generates money in a fundamentally different way — which is why a single “average” figure misleads. Sorting them first makes every number later make sense. For a deeper split, see the full guide to the main types of annuities.

Fixed and multi-year guaranteed annuities

A fixed annuity — including a multi-year guaranteed annuity, or MYGA — pays a set, contractual interest rate for a defined term, much like a bank CD. The rate is locked, so your return is the rate you signed for, minus nothing in annual fees.

Indexed annuities

A fixed indexed annuity credits interest linked to a market index, but that credit is limited by caps, participation rates, and spreads. Your principal is protected from market losses, and the upside is capped in exchange.

Variable and immediate annuities

A variable annuity has no set rate; its value rises or falls with mutual-fund-like subaccounts you choose, after fees. An immediate annuity is different again — it converts a lump sum into a stream of payments, which is a payout structure, not an investment yielding a stated return.

Average annuity returns by type: what’s realistic

There is no single average annuity return — it depends on the type. Here is the realistic picture for each, with what quietly subtracts from the headline figure.

Rates are illustrative and current as of mid-2026; fixed, indexed, and immediate-annuity pricing changes frequently with Treasury yields (industry rate aggregators). Fee figures: SEC. Indexed mechanics: FINRA.

Annuity rates rise and fall with the broader interest-rate environment, which is why today’s fixed rates sit near multi-year highs.

📊 Data Point: The Federal Reserve held its target range for the federal funds rate at 3.50%–3.75% as of June 2026 — Source: Federal Reserve, June 2026 FOMC materials.

For fixed buyers, the rate you lock is essentially your return. You can model how a locked rate compounds over a term with a compound interest and investment growth calculator, and read how the contracts work in the guide to how multi-year guaranteed annuities work. Indexed returns are harder to pin down because caps and floors reshape them; variable returns swing with markets minus the costs and risks of variable annuities.

✅ Action Step: Before buying, ask a fiduciary (fee-only) financial advisor one specific question: “What is the realistic net return after every fee on the exact contract you’re recommending, given my timeline?”

Payout rate vs. return: the number that fools people

The single most expensive misunderstanding in this whole topic is treating an income annuity’s payout rate as if it were an interest rate. It isn’t, and the difference is large.

Why a 7% payout isn’t a 7% return

🔍 How It Works: A payout rate is simply annual income divided by your premium. A $100,000 immediate annuity at a 7% payout sends $7,000 a year (about $583 a month). But much of each early payment is just your own $100,000 coming back to you — so the true internal rate of return is far lower, and only climbs the longer you outlive your premium.

That’s not a flaw; it’s how lifetime income works, because the insurer pools longevity risk across many buyers. The point is that the headline number answers a different question than “what will I earn.” See how the product works in the guide to immediate annuities (SPIAs).

How much a $100,000 annuity actually pays

A 65-year-old buying on a life-only basis might receive roughly $600–$650 a month per $100,000 in mid-2026, with the exact figure varying by carrier, age, and state. Older buyers receive more, because the expected payout period is shorter. For a fuller breakdown, see what a $100,000 annuity pays per month.

⚠️ Costly Mistake: Comparing a 7% annuity “payout” to a 5% CD as if both are interest. The CD pays interest on principal you keep; the annuity payout spends down principal you’ve handed over. They are not the same number.

What quietly lowers your annuity return

Several costs sit between the advertised figure and what you actually keep. Knowing the annuity fees and limits in advance is the difference between a realistic expectation and a sales number.

Variable annuity fees

📊 Data Point: A variable annuity’s base contract fee — the Mortality and Expense (M&E) Risk Charge — typically runs around 1.25% of account value per year — Source: SEC Office of Investor Education, “Variable Annuities” investor bulletin.

On top of that come the underlying fund expenses and the cost of any optional riders, such as a living-benefit or enhanced death benefit. Sales commissions on some annuities can also be substantial, which is part of why fees deserve scrutiny. A full breakdown lives in the guide to annuity fees.

Indexed limits: caps, participation, and spreads

🔍 How It Works: An indexed annuity rarely credits the full index gain. With a 75% participation rate, a 10% index year credits 7.5%; with a 3.5% spread, that same gain credits 6.5%; and a 7% cap limits a 12% index gain to 7% — and these terms can be reset annually by the insurer, per FINRA’s guidance on indexed annuities.

Surrender charges

⚠️ Costly Mistake: Pulling money out early. Withdrawals beyond the free amount, usually within the first six to eight years (sometimes longer), trigger a surrender charge — often starting around 7% — which can erase a year or more of gains. Your “realistic return” assumes you hold the full term.

Annuity returns vs. CDs, Treasuries, and the stock market

The real question isn’t just the annuity number — it’s whether that number beats your alternatives for the job you need done. It depends on what you’re optimizing for: certainty or growth.

For safety-to-safety comparisons, a top MYGA currently out-yields most CDs, though a CD is FDIC-insured while an annuity is backed by the insurer’s claims-paying ability (plus state guaranty-association coverage that varies by state). Treasuries are government-backed and fully marketable, but typically yield less than the best fixed annuities. You can line up a guaranteed annuity rate against a CD in the guide to MYGAs vs. CDs and check current CD math with a CD calculator.

Against the stock market, the tradeoff is starker.

📊 Data Point: The S&P 500 has returned roughly 10% a year on average over the long run (about 10.3% annually since 1957), though yearly results swing widely and averages are not annual guarantees — Source: Fidelity, S&P 500 historical average return.

A guaranteed 5%–6.5% gives certainty and removes sequence-of-returns risk; a stock portfolio offers higher expected growth with real volatility. Which mix fits depends on your other guaranteed income and your timeline — model it with a retirement and 401(k) calculator.

✅ Action Step: Ask a fiduciary or fee-only planner: “Given my other guaranteed income and risk tolerance, how much of my savings — if any — should be annuitized, and why this specific product over a CD ladder or bond fund?”

Mistakes that wreck your real annuity return

Understanding the numbers is only half the job; the other half is avoiding the errors that turn a reasonable product into a poor result. These are the avoidable ones.

1. Chasing the headline rate. A higher advertised number paired with higher fees, a lower cap, or annual resets can deliver less than a plainer contract. Compare the net, not the banner.
2. Surrendering early. Surrender charges plus a possible tax penalty can wipe out gains; an annuity’s return assumes you hold the term.
3. Buying an annuity inside an IRA for “tax deferral.” An IRA or 401(k) is already tax-deferred, so layering a tax-deferred annuity inside it adds cost without adding that benefit — ask why the deferral is needed.
4. Skipping a 1035 exchange. Moving from a high-fee contract to a better one can be done tax-free, but watch for a fresh surrender schedule on the new policy.
5. Not shopping carriers. Identical inputs produce different quotes across insurers; one set of numbers is never the market.

✅ Action Step: Before signing, ask a fiduciary advisor and a CPA: “Is there any tax-deferral benefit to holding this annuity in my IRA, and what is the full surrender schedule on any replacement contract?” Our “10 Questions to Ask Before You Buy an Annuity” checklist is a useful starting point.

Average annuity returns: frequently asked questions

The realistic picture — and your next step

The takeaway is simple: there’s no single average annuity return, so know your type, and treat the headline figure with healthy skepticism — especially when it’s a payout rate dressed up as interest. A fixed annuity’s return is its rate; an indexed annuity’s is capped; a variable annuity’s is your funds minus fees; and an immediate annuity pays income, not a yield.

Your next step is to shop at least three carriers, run your own numbers, and take any specific contract to a fiduciary advisor and a CPA before signing. If a quote-comparison tool or advisor match helps, use it — just know that’s a starting point, not personal advice.

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