Annuity: What Does It Mean?

An annuity is a financial contract between you and an insurance company where you make either a lump-sum payment or series of payments in exchange for regular income payments that begin either immediately or at a future date. Think of it as creating your own personal pension—a way to transform a portion of your retirement savings into predictable income you can count on for a specific period or for the rest of your life.

Annuities come in several varieties. Immediate annuities start paying you right away, while deferred annuities let your money grow before payments begin. Fixed annuities provide stable, predetermined payments, while variable annuities tie your income to investment performance. Some annuities guarantee payments for life, protecting you against the risk of outliving your savings—a growing concern as life expectancies increase.

While annuities can provide valuable peace of mind through guaranteed income, they also come with considerations like fees, surrender charges if you need early access to your money, and reduced flexibility compared to other retirement investments. The right annuity strategy depends on your complete financial picture, your other income sources, and how much certainty you need in retirement.