What Is an Annuity? The Basics Explained
Annuities can be a powerful retirement tool, but they're often misunderstood. Here's a simple breakdown of how they work.
Understanding Annuities An annuity is a contract between you and an insurance company. You make a lump sum payment or series of payments, and in return, the insurer provides you with regular income payments, either immediately or at some point in the future. Types of Annuities Fixed Annuities These provide guaranteed, predictable payments. The insurance company invests your money and guarantees a minimum rate of return. You know exactly what you'll receive each month. Variable Annuities Your payments depend on the performance of investments you choose, typically mutual funds. There's potential for higher returns, but also more risk. Indexed Annuities These offer returns tied to a market index (like the S&P 500) with downside protection. You won't lose money if the market drops, but your gains may be capped. When to Consider an Annuity You've maxed out other retirement accounts You want guaranteed income in retirement You're concerned about outliving your savings You want tax-deferred growth Annuities aren't right for everyone. Speaking with an independent advisor can help you determine if they fit your retirement strategy.