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Definition Of An Annuity

What Is an Annuity? Meaning, Benefits & Key Concepts

Planning for retirement involves making choices that provide both stability and flexibility. One financial tool designed to offer steady income and long-term security is the annuity. Annuities are contracts between you and an insurance provider that can convert savings into predictable payouts—helping you prepare for the possibility of a long life with rising expenses.

This guide explains what an annuity is, how it works, the different types available, and why many people include them in their retirement strategies. Whether you’re nearing retirement or building a long-term plan, understanding annuities is key to creating a resilient financial future.

1 | What an Annuity Means

At its core, an annuity is a financial agreement: you contribute funds to an insurer, and in return, you receive regular payments in the future. These payouts can begin right away (immediate) or after a set accumulation period (deferred). Payments can last for a specific term or for the rest of your life.
The Two Key Phases:
  • 1. Accumulation phase: Your money grows on a tax-deferred basis.
  • 2. Distribution phase: You begin receiving income based on your contract terms.
Common Types of Annuities:
  • 1. Fixed annuities – offer guaranteed interest and predictable payments
  • 2. Variable annuities – payments fluctuate with market performance
  • 3. Indexed annuities – returns are tied to an index with downside protection
  • 4. Immediate vs. Deferred – based on when you start receiving payments

Learn more from FINRA’s Annuities Overview, which breaks down annuity types and key considerations for investors.

2 | Comparison Chart: Annuity Types at a Glance

Annuity TypePayment TimingRisk LevelGrowth MethodBest For
FixedDeferred or ImmediateLowFixed interestIncome-focused retirees
VariableDeferredHighMarket-basedGrowth-oriented investors
IndexedDeferredModerateIndex-linkedBalanced growth with safety
ImmediateImmediateLowN/ARetirees needing income now
DeferredStarts laterVariesDepends on typeLong-term retirement planners

3 | Defining Key Terms and Examples

To understand annuities, it helps to know the essential terminology:
  • 1. Annuitant – the person receiving payments
  • 2. Beneficiary – inherits remaining funds after the annuitant’s death
  • 3. Surrender charge – a penalty for early withdrawal
  • 4. Qualified annuity – funded with pre-tax dollars (like through an IRA)
  • 5. Non-qualified annuity – funded with after-tax dollars

Example:

A 60-year-old invests $100,000 in a fixed annuity at a 4.5% rate. After 5 years, they receive guaranteed monthly payments for life. Want more clarity? See Annuity.org’s Glossary for a full list of annuity terms and definitions.

4 | How Annuities Work

Annuities are structured to offer both growth and guaranteed income. Here’s a simplified view:
  • 1. Choose a product and contribution amount.
  • 2. The insurer manages your funds during accumulation.
  • 3. At your chosen start date, the insurer begins issuing income payments.

Many contracts also offer riders—such as for long-term care or inflation protection.

According to The Wall Street Journal, higher interest rates have made fixed annuities more attractive for those seeking guaranteed returns.

5 | Benefits and Considerations

Why People Choose Annuities:
  • 1.Guaranteed income for life – helps prevent outliving your savings
  • 2.Tax-deferred growth – pay taxes when you withdraw, not while earnings accumulate
  • 3.Customizable options – including legacy and care benefits
  • 4.Market protection – especially with fixed or indexed annuities

Kiplinger explains how annuities are used to balance retirement portfolios without relying on market timing.

Considerations:

  • 1.Fees – especially with variable annuities, which include management and rider costs
  • 2.Limited liquidity – early withdrawals may incur surrender charges or penalties
  • 3.Complex contracts – features can be difficult to compare without expert guidance

6 | Frequently Asked Questions

A: Not exactly. A pension is typically employer-funded, while an annuity is a contract you purchase yourself.

A: Yes. The earnings are taxed as ordinary income when withdrawn, though your initial principal is not taxed again.
A: Most annuities allow you to name a beneficiary to receive remaining funds after your death.

7 | Final Thoughts

Annuities are not a one-size-fits-all solution, but they offer unique advantages for those seeking consistent income and protection against financial uncertainty. By understanding what an annuity is and how it fits into your broader retirement strategy, you can make informed decisions that support your long-term financial well-being.

As retirement planning becomes more complex, the importance of dependable income sources cannot be overstated. Annuities provide a structured way to convert savings into security. With professional guidance and a clear understanding of the terms, annuities can play an essential role in helping you retire with confidence.

8 | Next Steps

Ready to explore your annuity options?
  • 1.Learn the full breakdown of What Is an Annuity
  • 2.Compare income options through a Fixed Annuity
  • 3.Plan ahead with a Deferred Annuity

Annuities can provide a unique combination of security, longevity protection, and predictability. They’re not right for everyone, but for many retirees, they form a crucial piece of a reliable income strategy.

If you’re considering whether an annuity aligns with your long-term goals, reviewing your options with expert guidance can make all the difference. Start by exploring our What Is an Annuity guide, or contact our team to discuss the best solution for your retirement needs.

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