Annuities

What Is an Annuity?

An annuityAnnuityAn insurance product that earns interest and generates periodic payments over a specified period of time, typically with the purpose of providing income in retirement. is a contract with an insurance company that converts your savings into steady, predictable income. Many retirees turn to annuities to protect their lifestyle in retirement — guarding against market swings, ensuring they don’t outlive their money, and creating peace of mind for themselves and their families.

Why Annuities Matter

Annuities aren’t just about income; they’re about creating security. From guaranteed payments to family protections, here’s why annuities can be a valuable part of retirement planning.

Lifetime income. One of the greatest fears people have about retiring is running out of money. Annuities directly address this concern by offering payments that can last as long as you live. This creates a financial safety net for essentials, including housing, groceries, and healthcare.

Protection from market losses. Unlike investments that fluctuate with the stock market, certain types of annuities offer a reliable income stream even when markets decline. This insulation from volatility can help preserve your retirement lifestyle, particularly if you don’t want to risk losing savings at a stage of life when recovery time is limited.

Tax-deferred growth. While you wait to begin taking income, many annuities allow your money to grow on a tax-deferred basis. This means you won’t pay taxes until you start receiving payments, giving your savings the chance to compound more efficiently over time.

Options for your family. Retirement planning isn’t just about you — it’s also about those you love. Many annuities include death benefits or beneficiary provisions that ensure a spouse, children, or other heirs receive income or the remaining value of the contract after your passing. This legacy feature can be especially meaningful for people who want their savings to provide support beyond their own lifetime.

Retirement planning isn’t just about you — it’s also about those you love. Many annuities include death benefits or beneficiary provisions that ensure a spouse, children, or other heirs receive income or the remaining value of the contract after your passing. This legacy feature can be especially meaningful for people who want their savings to provide support beyond their own lifetime.

Types of Annuities

Different types of annuities are designed for various needs, and the “right” option often depends on your comfort level with risk, your retirement timeline, and the type of lifestyle you want to support.

Choosing can feel overwhelming, but seeing how real people in similar situations use annuities can make the decision more straightforward.

Real-World Scenarios

When Different Types of Annuities Make Sense

Each story highlights the emotional trigger, the practical fit, and the peace of mind payoff, so you can quickly see which option may align with your retirement strategy.

Fixed AnnuitiesSecurity Over Growth

Linda, 68 – Retired teacher

Fear: “I’m terrified one market crash will wipe out my retirement savings.“

Situation

Linda has a modest nest egg in CDs and savings accounts, but interest rates have barely kept up with inflation.

Solution

A fixed annuity guarantees her a stable rate of return, backed by the insurer, so her savings grow predictably. She locks in 5 years of guaranteed growth with no market exposure.

Why it works:
Linda feels relieved knowing she won’t lose money in a downturn. She can finally give herself permission to enjoy retirement.

Indexed AnnuitiesGrowth with Protection

Marcus, 60 – Small business owner

Fear: “If the market drops just before I retire, I won’t have time to recover.“

Situation

Marcus has a mix of 401(k) and brokerage assets. He likes growth potential but doesn’t want to risk a major market drop right before he retires.

Solution

An indexed annuity tied to the S&P 500 provides upside potential without direct market loss. Even if the market dips, he’s guaranteed a minimum rate.

Why it works:
Marcus can still participate in market gains — but sleeps at night knowing he won’t wake up to devastating losses just before his retirement starts.

Variable AnnuitiesFor Higher Risk Tolerance

Emily, 55 – Corporate executive

Fear: “I hate the thought of not protecting my savings from the market’s volatility.“

Situation

Emily is a high earner who maxes out her 401(k) and IRA. She wants tax-deferred growth and is willing to take on more risk for potentially higher returns.

Solution

A variable annuity with a guaranteed lifetime withdrawal benefit (GLWB) rider lets her invest in sub-accounts for growth but ensures she won’t run out of income.

Why it works:
Emily likes knowing she can still aim for higher returns, but she has a safety net to ensure her retirement lifestyle won’t collapse if markets underperform.

Annuities can be a great tool to help you generate retirement income or reach other financial goals, but there are many kinds of annuities. It’s important that you understand how they work to know if one is right for you.

Brandon Renfro, Ph.D., CFP®, RICP®, EACo-Owner of Belonging Wealth Management

As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

Quick Annuity Comparison

See how each annuity type compares at a glance — from risk and growth potential to when payments begin.

Type	Best For	Risk Level	Growth Potential	When Payments Start
Fixed	Conservative savers	Low	Steady, guaranteed	Future
Indexed	Growth and protection	Low-Medium	Moderate	Future
Variable	Higher risk investors	Medium-High	High	Future

How Annuities Work

At their core, annuities take the money you contribute — known as a premium — and turn it into a reliable stream of income. This process happens in two main phases: the accumulation phase and the payout phase. Understanding how each phase works can help you see why annuities are often used as a foundation for retirement security.

Step 1: Paying the Premium

When you buy an annuity, you start by paying a premium to the insurance company. This can be done as a single lump-sum payment — for example, rolling over a portion of your 401(k) balance — or as a series of payments made over time.

Step 2: Accumulation Phase

Once your money is inside the annuity, it enters the accumulation phase, where it grows on a tax-deferred basis. That means you won’t pay taxes on the growth until you start taking money out, giving your savings more room to compound compared to taxable products like CDs or brokerage accounts.

Step 3: Choosing How To Get Paid

When you’re ready to turn your savings into income, you can annuitize the contract — converting it into guaranteed payments — or make systematic withdrawals. Payments can begin right away (with an immediate annuity) or at a future date you select (with a deferred annuity).

You also choose the structure of your payout:

• Monthly income for life
• Payments for a set number of years
• Income that covers you and a spouse

Your choice will affect both the size of your payments and the level of protection for your family.

Step 4: Income Starts

Once the payout phase begins, the insurer takes on the most significant risks you face in retirement, market risk and longevity risk (the possibility of outliving your money). In exchange, you agree to the terms of the contract, which may include fees or limits on liquidity.

Why This Matters

• Tax-deferred growth gives your money a chance to compound faster, which can make a noticeable difference over long time horizons.
• Risk transfer means you don’t have to shoulder the burden of unpredictable markets or worry about running out of income if you live longer than expected.

How Do Annuities Pay Out?

Annuities let you choose how income is paid — for a set time, your lifetime, or both spouses’ lifetimes. This table shows what each option provides, who it’s best for, and the trade-offs.

Option	What You Get	Best For	Trade-Off
Period Certain	Payments for 5-20 years	Covering near-term expenses	Payments stop after the term
Single Life	Income for your lifetime	Maximizing monthly income	No survivor benefits
Life w/Period Certain	Lifetime income + minimum years guaranteed	Balancing lifetime income & legacy	Lower payment than straight life
Joint & Survivor	Income while either spouse is alive	Spousal protection	Lower payment than single life

How Annuity Rates Impact Payout

Annuity rates play a direct role in how much income you receive. Think of them as the “engine” behind your payout:

• Higher rates = bigger monthly checks. When prevailing interest rates are higher, insurance companies can invest your premium more profitably, which allows them to pay you more income.
• Lower rates = smaller payouts. In low-rate environments, your monthly income will be lower because the insurer earns less from its investments.
• Timing matters. Locking in an annuity when rates are rising often results in better payouts than buying when rates are near historic lows.
• Other factors still apply. Your age, sex, premium amount, and payout type all interact with rates. For example, even with a modest rate, starting at an older age generally produces higher monthly payments because the insurer expects to pay for fewer years.

In short, annuity rates work like the lever that adjusts the size of your guaranteed income. The higher the rate at the time you purchase, the more you’ll receive each month for the same premium.

Annuities vs. Other Products

When deciding where to keep your money, it helps to compare annuities to other common savings tools. The chart below highlights the key differences in interest rates, terms, taxes, and withdrawal rules for fixed annuities, savings accounts, and certificates of deposit (CDs).

Disadvantages of Annuities

No financial product is perfect, and annuities are no exception. While they can provide lifetime income and peace of mind, they also come with trade-offs that may not fit every retiree’s needs. Before you commit, it’s essential to understand the potential downsides.

1. Limited Liquidity
Once you put money into an annuity, it can be hard to access without penalties. Most contracts restrict how much you can withdraw each year, and early withdrawals often trigger surrender charges.

2. Surrender Charges
If you take out more than the allowed amount — especially in the first 5 to 10 years — you may face hefty fees that reduce your payout.

3. Fees and Costs
Variable and indexed annuities often come with administrative fees, mortality and expense charges, and optional rider costs. These fees can eat into your returns if not carefully considered.

4. Complexity
Annuities can be hard to understand. The variety of products, riders, and payout options means it takes time — and often professional guidance — to make a fully informed choice.

5. Potentially Lower Returns
Compared with investing directly in stocks or mutual funds, annuities may deliver lower long-term growth. The trade-off is security and guaranteed income versus higher growth potential with more risk.

6. Tax Treatment on Withdrawals
While growth is tax-deferred, withdrawals are taxed as ordinary income — not at lower capital gains rates. That can mean a bigger tax bill for some investors.

7. Inflation Risk
Unless you add an inflation rider (often at extra cost), fixed payments can lose purchasing power over time as the cost of living rises.

Is an Annuity Right for You?

Annuities aren’t right for everyone, but for many retirees they provide peace of mind, protection, and guaranteed income. Use our calculator or connect with a licensed specialist to see if an annuity could strengthen your retirement plan.

We asked Senior Annuity Specialist Scott Saffe to answer common questions about how annuities work and what to consider before choosing one.

Q&A With Scott Saffe, Senior Annuity Specialist at Annuity.org