An annuity is an insurance contract intended to provide a guaranteed income, usually after retirement, that one cannot outlive. People most often use annuities to save money for their retirement. Many use it to create an extra retirement income. Along with Social Security, pensions and military retired pay, annuities make sure you will have enough guaranteed income to pay your bills without touching long term savings and investments.
While life insurance provides financial protection against dying too soon, annuities provide financial protection against living too long. They do this by guaranteeing a stream of income for life. Some annuities also use the power of tax deferral — earnings aren’t taxed until they’re withdrawn — so your money can grow faster.
An annuity may be considered either a savings annuity (often referred to as a deferred annuity) or an income annuity (often referred to as an immediate annuity). Savings annuities allow your money to grow tax deferred over time and provide regular payouts during your retirement years. Income annuities use your one-time contribution to produce a regular income stream immediately.
Annuities also can be fixed or variable. Fixed annuities earn a steady rate of interest and are guaranteed to grow every year. Variable annuities offer a variety of investment options, allowing you to tailor your investment based on your tolerance for market risk.
Guaranteed savings annuities provide a unique blend of features:
- Guaranteed growth
- Tax-deferred compounding
- Guaranteed minimum interest rates
- No market risk