What Is an Annuity?

A Simple Definition

An annuity is a contract between you and an insurance company. In exchange for a lump sum or a series of payments, the insurer agrees to provide you with regular income — either immediately or at a future date. Many retirees use annuities to create a stream of guaranteed income that can last for life.

How Annuities Work

Annuities generally have two phases. During the accumulation phase, your money grows tax-deferred inside the contract. During the payout phase, the insurer converts your balance into income payments. Depending on the type of annuity you choose, those payments can be fixed, variable, or tied to a market index — and they can last for a set number of years or for the rest of your life.

Why Retirees Consider Annuities

Common Types of Annuities

• Fixed Annuities — Offer a guaranteed interest rate for a set period.
• Fixed Indexed Annuities — Growth tied to a market index with downside protection.
• Variable Annuities — Growth tied to investment subaccounts; more risk and reward.
• Immediate Annuities — Begin paying income shortly after purchase.
• Deferred Income Annuities — Begin paying income at a future date you choose.

Is an Annuity Right for You?

Annuities aren't right for everyone — but for many retirees, they fill a critical role: providing reliable income that complements Social Security, pensions, and investment portfolios. The right choice depends on your goals, timeline, and how much guaranteed income you want in retirement.