Annuity Basics

What is an annuity and should you consider one?

An annuity is a contract between you and an insurance company. You pay a lump sum or series of payments, and they agree to send you guaranteed income later usually in retirement.

How an annuity works

Think of it like building your own pension. You put money in (the accumulation phase), it grows tax-deferred, and then you receive payments (the income phase). The big difference from a 401(k) or IRA? Annuities can guarantee you will not outlive your money no matter how long you live.

The insurance company spreads risk across thousands of customers. Some will collect payments for 20 years, others for 40. The guarantee works because the insurer can predict average life expectancy across a large group even though no one knows their own lifespan.

One in three 65-year-olds today will live past 90. A guaranteed income stream protects against the biggest retirement fear: running out of money.

The three main types

Each type serves a different purpose. The right one depends on what matters most to you.

TypeHow growth worksRisk levelBest for

FixedInsurer declares a fixed interest rate for a set termLowGuaranteed, predictable growth

Fixed IndexReturns tied to a market index (e.g. S&P 500), with a floor against lossesLow-ModerateGrowth potential with principal protection

VariableYou choose subaccounts that invest in the marketHighHigher upside potential, accepts market risk

SPIA / IncomeImmediate guaranteed payments starting within a yearLowInstant retirement income stream

Why timing matters right now

Annuity rates follow interest rates. When the Fed cuts rates, new annuities pay less. Here is the current picture:

Rates in 2025 are still near multi-year highs but the Fed has signaled cuts ahead.
Lock in a rate today and you keep it for the life of the contract.
Every 0.5% drop in rates reduces your lifetime income by roughly 5-8%.
Waiting one year could cost you thousands in guaranteed income over retirement.

This is not a sales pitch. It is just math. If you are already thinking about guaranteed income, the cost of waiting is real and it compounds in the wrong direction.

Example: A 65-year-old with $200,000 could get about $1,100-$1,300/month in guaranteed lifetime income at current rates. If rates drop 1%, that same $200,000 may only produce $950-$1,100/month. Same money. Less income. Forever.

Questions to ask yourself

Take a moment. Your answers will tell you if an annuity makes sense for your situation.

1. What if you live to 95?

Your savings need to last 30 years or more. Do you have enough guaranteed income to cover basic expenses that long? Social Security alone usually replaces only about 40% of what you earned before retirement.

2. How much market risk can you handle?

If your portfolio drops 20% the year you retire, your safe withdrawal rate drops too. An annuity protects your income from market swings.

3. Do you want to leave money behind or maximize your own income?

Life-only annuities pay the most each month but leave nothing to heirs. Riders can change that trade-off. Knowing your priority helps pick the right contract.

4. What is your income gap?

Add up your estimated Social Security, pension, and other income. Subtract your monthly expenses. The difference is what you are short. Annuities are built to fill exactly that gap.

The real benefit: peace of mind

The deepest value of an annuity is not the rate or the tax deferral. It is the certainty. Knowing that no matter what the market does, no matter how long you live, a check shows up every month. That changes how you enjoy retirement.

Retirees with guaranteed income report higher well-being than those relying only on portfolio withdrawals even when they have the same total assets. The reason is simple: guaranteed income removes the fear of running out of money.

Not sure which type fits your situation?

Talk through the options with a licensed professional who works across multiple carriers, not one pushing a single product.

Explore your income options →