An annuity isn't an investment, it's a contract. You hand an insurance company money, either as a lump sum or over time, and they guarantee to pay you income later, often for the rest of your life. The tradeoff is liquidity. Your money is generally locked up during a set period in exchange for that guarantee.
How an annuity differs from life insurance
Life insurance protects your family if you die too soon, whether that's a permanent policy (see is whole life insurance worth it) or a smaller final expense insurance policy meant to cover burial costs. An annuity protects you if you outlive your savings, which is a real risk now that retirements can stretch past 25 years. The payment can work two ways: lifetime income, where the check keeps coming no matter how long you live, or interest income, where your balance grows and you decide later how to take it.
The main types of annuities
The type of annuity you need usually matters more than which specific carrier you pick. A single premium immediate annuity, or SPIA, is the simplest version: you hand over a lump sum and payments start within a month to a year. Most planners agree this is the version that actually makes sense for a lot of retirees, especially anyone without a pension who wants their basic bills covered beyond Social Security.
A multi-year guaranteed annuity, or MYGA, works like a CD with a tax-deferred wrapper. You lock a fixed rate for three, five, or seven years. A fixed index annuity links your growth to something like the S&P 500 with a cap on the upside, but your principal doesn't drop when the index does. A deferred income annuity, sometimes structured as a QLAC inside a retirement account, delays your payments to a future date in exchange for a bigger check when they start.
What does a real payout look like?
A 65-year-old man putting around $250,000 into an immediate annuity can generally expect somewhere near $1,600 to $1,700 a month for life, depending on the carrier and where rates sit at the time. Women tend to see slightly lower monthly payments for the same premium, since the payout gets spread across more expected years. MYGA rates have recently been running 4.5% to 6% or higher depending on term, which is well above what most bank CDs pay right now.
What you give up for the guarantee
Here's what you give up for the guarantee: access to your cash. Pull money out early beyond the free-withdrawal amount and you'll usually eat a surrender charge for several years. Fixed payments also don't adjust for inflation on their own, so a $1,600 check today buys less ten years from now unless you pay extra for an inflation rider.
Who annuities actually fit
Annuities tend to fit retirees without a pension, anyone close to or already in retirement, people who've already maxed out their 401k or IRA and want more tax-deferred growth, and anyone who can't stomach the idea of a bad market year wrecking their retirement timeline. They're rarely the right call for anyone well under 50, since the payout math depends on a much longer time horizon. Be careful if you're being sold something complicated with riders you don't fully understand, or if there's any real chance you'll need that principal back during the surrender period.
FAQ
Is an annuity the same as an investment?
No. An investment carries market risk with no guarantee. An annuity shifts that risk to the insurance company in exchange for a promise.
Can I lose money in an annuity?
Not to market losses, if it's fixed or fixed-index. You can still lose value to surrender charges on an early withdrawal, or to inflation slowly eating into a fixed payment over time.
How fast can payments start?
Immediate annuities usually start within a month to a year. Deferred versions can be structured to start years or decades out, in exchange for a bigger eventual check.
Is there a best annuity rate right now?
Not really, it depends on whether you're optimizing for growth or income, your time horizon, and the product type. This is exactly the kind of decision worth running past someone who can compare offers across multiple carriers instead of just one.