A Brief Explanation of Annuities
What Are Annuities and How Do They Work?
When planning for retirement, many people worry about running out of money. One financial tool designed to address this concern is the annuity. Annuities are contracts with insurance companies that can provide guaranteed income, often for the rest of your life.
How Annuities Work
With an annuity, you either:
Pay a lump sum up front, or
Contribute payments over time.
In exchange, the insurance company promises to provide income either right away (immediate annuity) or in the future (deferred annuity).
Types of Annuities
Immediate Annuities
Start paying income almost immediately after purchase.
Often used by retirees seeking steady, predictable income.
Deferred Annuities
Grow your money tax-deferred until a future date when payouts begin.
Useful for long-term retirement planning.
Fixed Annuities
Provide guaranteed interest rates and steady payments.
Low risk, but typically lower returns.
Variable Annuities
Allow investment in sub-accounts (similar to mutual funds).
Payments can rise or fall depending on performance.
Indexed Annuities
Returns are linked to a market index (like the S&P 500) with caps and floors.
Offer potential for higher earnings with some protection against losses.
Benefits of Annuities
Guaranteed lifetime income (depending on contract type).
Tax-deferred growth until withdrawal.
Protection against outliving your savings.
Who Might Benefit from Annuities?
Retirees who want predictable income for life.
People who have maxed out other retirement accounts (401k, IRA) and want another tax-deferred option.
Individuals concerned about longevity risk—living longer than their savings would last.
Bottom Line:
Annuities aren’t for everyone, but they can be a powerful tool for financial security in retirement. If you’re considering one, be sure to compare types, understand the fees, and work with a financial professional to see if an annuity fits your long-term goals.