Planning for retirement is about more than saving money. It’s also about making sure your savings can provide dependable income when you need it.
Annuities can be one option for turning a portion of your retirement savings into predictable income. Depending on the type of annuity, you may be able to protect your principal, earn interest, participate in market growth, or create income that lasts for life.
In this guide, we’ll explain how annuities work, the major types, and what to consider before choosing one.
What Is an Annuity?
An annuity is a contract between you and an insurance company.
You provide money to the insurance company, either as a lump sum or through payments over time. In return, the insurance company provides benefits according to the contract. Depending on the annuity, those benefits may include interest accumulation, tax-deferred growth, or guaranteed income.
Annuities are commonly used as part of a retirement income strategy.
Why Consider an Annuity for Retirement?
One of the biggest retirement concerns is making your savings last.
Unlike a traditional investment account, certain annuities can provide a stream of income that continues for a specified period or, depending on the contract, for the rest of your life.
Annuities may help with:
- Creating predictable retirement income
- Managing longevity risk
- Protecting against certain market losses
- Growing retirement savings on a tax-deferred basis
- Building a retirement income strategy around your goals
However, annuities are not right for everyone. Contract terms, fees, surrender periods, guarantees, and the financial strength of the insurance company should all be considered.
Types of Annuities
There are several types of annuities, and each works differently.
Fixed Annuities
A fixed annuity provides a guaranteed interest rate for a specified period according to the contract.
Fixed annuities may appeal to people who prioritize stability and predictable growth over direct market exposure.
Fixed Indexed Annuities
A fixed indexed annuity (FIA) can provide interest credits linked to the performance of a market index.
You generally don’t invest directly in the index. Instead, the insurance company uses a crediting method that may involve a cap, participation rate, or spread.
These products can offer the opportunity for interest credits based on index performance while providing contractual protection from certain market losses.
Variable Annuities
A variable annuity allows you to allocate money among investment options within the contract.
Because the underlying investments can fluctuate, the value and potential returns can vary. Variable annuities may offer more growth potential, but they also involve greater investment risk and can have more complex fees and features.
Immediate Annuities
An immediate annuity is designed to begin providing income relatively soon after you make your premium payment.
A Single Premium Immediate Annuity (SPIA) can convert a lump sum into a stream of income based on the payout option you select.
Deferred Annuities
A deferred annuity allows your money to accumulate before income payments begin.
This can make deferred annuities useful for people who are still working or who don’t need retirement income immediately.
How Much Money Should You Put Into an Annuity?
There is no universal percentage or dollar amount that works for everyone.
Your decision should take into account:
- Your retirement income needs
- Social Security and pension income
- Emergency savings
- Other investments and assets
- Your timeline
- Your comfort with investment risk
- Your need for access to your money
- Your goals for leaving assets to beneficiaries
An annuity should generally be considered as part of your overall retirement strategy rather than automatically replacing your entire investment portfolio.
What Are the Benefits of Annuities?
Depending on the product and contract, potential benefits can include:
Lifetime Income
Certain annuity contracts can provide income that continues for your lifetime, helping address the risk of outliving your savings.
Predictable Growth
Some fixed annuities provide a guaranteed interest rate for a specified period.
Tax-Deferred Growth
With certain non-qualified annuities, taxes on interest and investment gains generally aren’t paid until money is withdrawn.
Protection From Certain Market Losses
Some fixed annuity products can provide contractual protection from market declines, although this does not mean every type of annuity is protected from loss.
Retirement Income Flexibility
Different payout options allow you to structure income around your retirement goals.
What Are the Downsides?
Annuities also have important trade-offs.
Depending on the contract, you may encounter:
- Surrender charges for early withdrawals
- Limited access to your principal
- Contract fees or expenses
- Complex features and crediting methods
- Inflation risk
- Lower potential growth than certain market investments
- Insurance-company credit risk
That’s why it’s important to understand the complete contract—not just the advertised interest rate or income figure.
How Do You Choose the Right Annuity?
Start by identifying what you want the annuity to accomplish.
If your priority is guaranteed growth, you may want to explore fixed annuity options.
If you’re interested in market-linked interest potential with contractual downside protection, a fixed indexed annuity may be worth considering.
If your primary goal is lifetime income, an immediate or income annuity may be more relevant.
If you’re looking for investment exposure and additional growth potential, a variable annuity may be appropriate for some investors.
The right choice depends on your financial situation, goals, timeline, and risk tolerance.
Questions to Ask Before Buying an Annuity
Before purchasing an annuity, consider asking:
- What type of annuity is this?
- How long is the surrender period?
- What fees and charges apply?
- How is interest calculated?
- What happens if I need my money early?
- What income options are available?
- What happens to the money if I die?
- How financially strong is the insurance company?
- What guarantees are contractual?
- How does this annuity fit into my overall retirement plan?
Annuities Should Fit Your Retirement Strategy
There isn’t one annuity that is best for everyone.
The goal isn’t simply to find the highest advertised rate. It’s to understand the contract, compare the available options, evaluate the insurance company behind the guarantees, and determine whether the product fits your retirement objectives.
A thoughtful comparison can help you decide whether an annuity belongs in your retirement income strategy—and, if it does, which type may make the most sense.
Ready to Explore Your Annuity Options?
Money Man 4 Integrity helps individuals and families understand their annuity options in straightforward language.
Whether you’re looking for guaranteed lifetime income, fixed growth, fixed indexed options, or other retirement income solutions, you can explore your options and speak with a licensed professional before making a decision.
Learn more about annuities or get personalized guidance today.
This article is for educational purposes only and is not financial, tax, or legal advice. Annuity features, rates, fees, guarantees, and availability vary by insurance company, state, and contract. Review the specific contract and consult an appropriately licensed professional before purchasing.