Annuity
An annuity is a financial contract with an insurance company that provides a steady income stream in exchange for a lump sum or a series of payments. These income payments can be for a specific period or for the rest of your life, making them a popular tool for retirement planning. Annuities offer a guaranteed income to help protect against outliving savings and can include benefits like tax-deferred growth.
How it works
You pay
You pay a financial institution a lump sum of money or make a series of regular payments.
They pay you
In return, the insurer agrees to send you a stream of income at future dates, which can start immediately or after a growth period.
Goal
The primary goal is to provide a reliable, predictable income source, especially during retirement. For systematic payouts from market investments, see SWP.
Key features and benefits
Annuities blend protection, income, and tax efficiency to help secure retirement cash flow as part of broader financial planning.
Guaranteed income
Offers a predictable income stream that can last for a fixed term or the rest of your life, reducing the risk of outliving your savings.
Retirement planning
Acts as a cornerstone of retirement planning, giving you a reliable base of cash flow to budget around other investments.
Tax advantages
Funds grow on a tax-deferred basis, so you only pay taxes when you receive income or withdraw principal.
Flexible options
Choose between fixed annuities for steady rates or variable options for growth potential.
Important considerations
- Early withdrawal penalties: Taking money out of a deferred annuity before age 59 1/2 may trigger a 10% IRS penalty on the taxable portion.
- Taxes: While growth is tax-deferred, the taxable portion of your income payments is taxed at your ordinary income rate once withdrawals begin.