Annuity
What Is an Annuity?
An annuity is a financial contract between an individual and an insurance company in which the individual invests money in exchange for future payments. Annuities are commonly used as retirement income tools because they can provide a steady stream of payments over time.
Annuities may begin payments immediately or at a future date depending on the type of annuity purchased.
Why It Matters
One of the biggest financial risks in retirement is outliving your savings. Annuities help address this concern by providing predictable income during retirement.
They can also offer tax-deferred growth, meaning investment earnings are not taxed until withdrawals begin.
How an Annuity Works
When purchasing an annuity, an individual either makes a lump-sum payment or contributes funds over time.
The insurance company then invests the funds and later distributes payments according to the contract.
Annuity payments may occur:
- monthly
- quarterly
- annually
- for a fixed number of years or for life
The specific structure depends on the annuity contract.
Example
A retiree purchases an annuity with $200,000 and receives monthly payments for the rest of their life.
Annuity vs Pension
- An annuity is typically purchased by an individual.
- A pension is usually provided by an employer retirement plan.
FAQs About Annuities
Are annuities only for retirement?
They are primarily used for retirement income but can serve other long-term financial goals.
Are annuity earnings taxed?
Yes. Earnings are usually taxed when withdrawals begin.
Can annuity payments last for life?
Yes. Some annuities guarantee lifetime income.
Related Terms
