Annuity — The Dollar Dictionary

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Finance

Annuity

A financial product that pays out a fixed stream of income over a set period, typically used for retirement planning.

There are two main types: immediate annuities (you pay a lump sum and income starts right away) and deferred annuities (you invest over time and income begins later, at retirement). Variable annuities tie payouts to investment performance; fixed annuities guarantee a specific payment regardless of markets. Fixed annuities provide certainty; variable annuities provide inflation protection potential.

The main risk with annuities is longevity versus value. If you buy a lifetime annuity and die two years later, the insurance company keeps most of your money. If you live to 95, you've gotten an extraordinary deal. Annuities are fundamentally insurance against outliving your money — a real risk that most people seriously underestimate when planning for retirement.

An annuity is like buying a paycheck that arrives every month for the rest of your life. You hand over a lump sum — say, $500,000 — to an insurance company. In return, they promise to send you $2,500 every month until you die. You've converted a pile of money into a guaranteed income stream.

Real world: After retiring with a $1 million 401(k), a 65-year-old American might put $400,000 into an annuity to cover fixed expenses — rent, utilities, groceries. The remaining $600,000 stays invested for growth and flexibility. The annuity provides a floor of certainty; the invested portion provides upside. This combination lets them sleep at night regardless of market conditions.

💡 An annuity trades a lump sum for guaranteed income — it's insurance against the risk of outliving your money, which grows more valuable the longer you live.

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