Retirement guide
Annuities
An annuity is a contract with an insurance company that turns your savings into a stream of income, which can be guaranteed for as long as you live. Fixed, variable and indexed annuities trade certainty against growth in different ways.
What it is
You give an insurance company a sum of money, at once or over time. In return it pays you income, either for a set period or for life. The income can be guaranteed for as long as you live, which protects you from running out of money in a long retirement.
Every annuity is a trade between certainty and upside. The three families below differ in where they put that line.
How it works
Three types, three shapes of risk.
Fixed annuities
A guaranteed interest rate and predictable income. No market risk. The conservative, stable choice.
Variable annuities
Investment options with growth tied to the market. More upside, but you carry the market exposure.
Indexed annuities
Growth linked to a market index, with principal protected on the downside. A middle ground.
Who it suits
Where an annuity fits.
An income floor
Guarantee enough income to cover essential bills, so other savings are free to keep growing.
Protection against a long life
Income that continues as long as you live, however long that is.
A steadier portfolio
A layer of guaranteed income beside market investments, so the whole plan rides steadier.
Tax treatment
How annuities are taxed.
Tax-deferred growth
Gains aren't taxed until you withdraw them, so they compound faster than in a taxable account.
No contribution limits
Unlike IRAs and 401(k)s, non-qualified annuities have no annual cap.
Planned withdrawals
You control when and how much you take, which helps manage your tax bracket in retirement.
For beneficiaries
Annuities pass to named beneficiaries outside probate, often with options to keep deferring tax.
Cover your must-pay bills with guaranteed income first, then take risk with the rest.
Cost
What it costs.
Costs depend on the type. Fixed annuities usually build their costs into the rate they credit. Variable annuities carry investment and contract fees. Optional riders, such as guaranteed lifetime income, add a charge.
Most annuities have surrender charges for a set number of years. Most allow penalty-free withdrawals each year, typically up to 10% of the value; take more than that early and the surrender charge applies.
Coverage and pricing depend on underwriting, eligibility, state availability, and carrier approval.
At a glance
The three types side by side.
| Topic | Fixed | Variable | Indexed |
|---|---|---|---|
| Growth | Guaranteed rate | Tied to the market | Linked to an index, capped |
| Downside risk | None | You carry it | Principal protected |
| Complexity | Simple | Higher | Moderate |
| Best for | Certainty | Growth | A balance of both |
Questions and answers
What people ask us.
When should I buy an annuity?
Usually 5 to 10 years before retirement. That gives the money time to build and gives us time to plan your income properly.
What if I need my money early?
Most annuities allow penalty-free withdrawals each year, typically up to 10% of the value. Take more than that during the surrender period and you may pay a surrender charge.
Are annuities insured?
They're backed by the insurance company's financial strength and by state guaranty associations. Coverage limits vary by state, which is one reason carrier choice matters.
Related guides
Read next.
Retirement planning
How income needs, annuities and insurance fit into one plan for the years after work.
Read the guideIndexed universal life
Permanent coverage with flexible premiums and growth linked to a market index.
Read the guideWhole life insurance
Coverage that never expires, with a fixed premium and guaranteed cash value.
Read the guideTurn savings into income you can count on.
Thirty minutes on what your essential bills are and how much income should be guaranteed.
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