What Is an Annuity?

Annuities work in two main phases: accumulation and distribution.

During the accumulation phase, you pay premiums into the contract — either as a single lump sum or through multiple contributions over time. Your money then grows on a tax-deferred basis, allowing it to compound faster than a taxable account.

When you enter the distribution phase, you begin receiving payments based on your contract terms. You can choose to receive income for a set period or for the rest of your life.

Many people use annuities to help fill income gaps after they stop working — especially when pensions or other guaranteed income sources aren’t available.

Different annuities are designed for different financial goals. The right choice depends on how much risk you’re comfortable taking, how soon you need income, and whether you prefer guaranteed growth or market-linked returns.

Each annuity type offers unique advantages. For instance, a fixed annuity provides predictable returns and principal protection, while a variable annuity offers growth potential with greater risk exposure.

Everyone’s retirement story looks different — and so do their income needs. Here are a few real-world scenarios showing how different types of annuities can support various goals and comfort levels.

Linda, 67 — Retired Teacher
Linda has always been careful with her money. Most of her savings sit in a high-yield savings account and certificates of deposit (CDs), but she’s worried that inflation could eat away at her returns. She doesn’t want to risk the stock market this late in retirement — she just wants steady, predictable income.

How a Fixed Annuity Helps:
Linda purchases a five-year fixed annuity with a guaranteed interest rate. Her money grows steadily without market exposure, and she knows exactly how much income she’ll receive each year.

Why It Works:
The annuity gives Linda peace of mind — she can budget confidently, knowing her retirement income is safe from market swings.

Marcus, 60 — Small Business Owner
Marcus plans to retire within five years. He’s built a strong portfolio through his 401(k) and other investments, but he’s worried about retiring during a market downturn.

How a Fixed Indexed Annuity Helps:
Marcus chooses a fixed indexed annuity linked to the S&P 500. His contract guarantees he won’t lose principal if the market dips — but if the market performs well, he can share in those gains up to a capped amount.

Why It Works:
Marcus gets a balance of safety and opportunity. His retirement funds keep growing, but he doesn’t have to fear losing years of progress if the market corrects before he retires.

Emily, 55 — Corporate Executive
Emily is a high earner who maxes out her 401(k) every year. She’s comfortable with some investment risk and wants to grow her savings while protecting against longevity risk — the fear of outliving her money.

How a Variable Annuity Helps:
Emily invests in a variable annuity that allows her to choose from several subaccounts (similar to mutual funds). She also adds a guaranteed lifetime withdrawal benefit (GLWB) rider, which ensures she’ll receive income for life even if the market drops later.

Why It Works:
Emily can pursue growth during her peak earning years but still lock in lifetime income for her future retirement years.

Annuities can be a valuable part of a balanced retirement plan, but they’re not right for everyone. Here’s a clear look at their advantages and disadvantages to help you decide if they fit your needs.

Buying an annuity is simpler than many people think — but it does require careful planning and comparison. Because annuities are long-term commitments, it’s important to understand how they fit into your retirement strategy before signing a contract.

Here’s how to get started.

Before you buy, identify your main goal. Are you looking for:

• Guaranteed lifetime income?
• Growth without market risk?
• A way to pass money to your heirs?

Your goal determines which type of annuity makes the most sense — fixed, indexed or variable.

You can choose an immediate annuity, which starts paying income right away, or a deferred annuity, which lets your money grow before payments begin.

• Immediate annuities are often best for retirees who want income now.
• Deferred annuities work well if you’re still saving and want future income.

Annuities are sold by insurance companies, but you can also buy them through banks, financial advisors, and brokerage firms. Because each insurer offers different rates and terms, shopping around is key.

When comparing providers, look for:

• Strong financial ratings from independent agencies like AM Best or Standard & Poor’s.
• Transparent fee structures with no hidden charges.
• Flexible contract options that match your income goals.

Before committing, read the annuity contract in full or review it with a licensed professional. Make sure you understand:

• Surrender periods and withdrawal limits
• Any added fees or riders
• How and when your payments will begin

You can purchase an annuity in several ways:

• With savings or cash from your bank account
• By rolling over funds from a 401(k), IRA, or another retirement account
• Through a qualified plan, if offered by your employer

Be sure to consult a financial or tax professional before transferring funds from another account to avoid unnecessary taxes or penalties.

Once your contract is funded and finalized, you’ll select how and when to receive payments. You can choose:

• Monthly, quarterly, or annual payments
• Income for life or for a fixed period
• Single or joint payouts (to cover your spouse as well)

This flexibility lets you tailor the annuity to your retirement lifestyle, whether you want consistent income to cover monthly bills or a deferred payout later in life.

An annuity is a long-term financial product designed to provide steady income, often for life. Many retirees use annuities to supplement Social Security or pension benefits, ensuring they have predictable income even as other investments fluctuate.

When you buy an annuity from an insurance company, you’re essentially exchanging a lump sum or a series of payments for guaranteed future income. Depending on the type of annuity, you can begin receiving payments immediately or defer them until a later date, such as when you retire.

Unlike most investments, annuities are built for income stability and protection. They can help safeguard your savings against market downturns and reduce the risk of outliving your money.