What Is an Annuity, and When Does One Make Sense?

The main types in plain terms

Most annuities sold to retirees fall into a few categories:

• Fixed annuity: a set interest rate for a set period, similar in feel to a certificate of deposit
• Fixed indexed annuity: growth linked to an index with a floor that protects against market loss, subject to caps or participation rates
• Immediate annuity: you convert a lump sum into income payments that begin right away
• Deferred income annuity: you fund it now and income begins on a future date you choose

What an annuity is good at

The strongest use case is turning savings into predictable income. Social Security and a pension cover part of your monthly needs. An annuity can cover the remaining fixed expenses so your essential bills are funded regardless of what markets do in a given year.

The trade offs to understand first

Annuities are long term contracts and they are not right for every dollar you own.

• Surrender charges usually apply if you withdraw more than the free amount during the early years
• Money in an annuity is less liquid than money in a savings account
• Indexed products limit upside through caps, spreads, or participation rates
• Riders that add guarantees usually come with an annual fee

Questions to ask before signing anything

A good annuity conversation slows down rather than speeds up. Ask what the surrender period is, how much you can withdraw each year without penalty, exactly how growth is credited, what every fee costs, what happens to the balance when you pass, and what the insurance company's financial strength ratings are. If any answer is vague, that is your signal to keep asking.