Understanding Annuities: A Simple Guide to Lifetime Income

What Is an Annuity?

An annuity is a long-term agreement with an insurance company that converts accumulated savings into guaranteed payments for a set period or for life. Because payouts can last as long as you do, an annuity can serve as a personal pension and protect retirees from outliving their money.

Main Types of Annuities

Fixed Annuity

A fixed annuity credits a predetermined interest rate and delivers stable, predictable income. Payments never fluctuate, making it attractive to conservative investors who want to preserve principal, avoid market volatility, and simplify budgeting throughout retirement. Most contracts also offer tax-deferred growth.

Variable Annuity

A variable annuity invests premiums in sub-accounts like mutual funds. Future income rises or falls with the market, offering higher growth but greater risk. Optional income guarantees can help soften downturns.

Indexed Annuity

An indexed annuity splits your money between a fixed account and an interest credit linked to a market index such as the S&P 500. Caps and participation rates limit upside, yet you cannot lose principal to market declines.

Key Benefits

Beyond lifetime income, annuities offer tax-deferred growth, death benefits for heirs, and freedom from required minimum distributions. They also allow you to customize payouts—monthly, quarterly, or annually—to match pension checks or Social Security, creating a coordinated retirement income plan.

Potential Drawbacks

However, annuities can be complex and carry surrender charges, mortality and expense fees, and 10% IRS penalties on withdrawals before age 59½. Many contracts also impose limited liquidity, so be sure you can commit funds you may not need immediately.

How to Choose the Right Annuity

Determine your retirement income gap, risk tolerance, and time horizon before buying. Compare insurance carrier ratings, fees, and payout options. Consulting a fiduciary financial adviser can help you align the right annuity type with your broader investment and estate strategies.

Bottom Line

Annuities can secure dependable cash flow when other sources stop. Evaluate features and fees to decide whether one belongs in your retirement toolkit.