What Is an Annuity? A Plain-English Guide

The Basic Idea

An annuity is a contract with an insurance company, not an investment. In exchange for a lump sum or a series of payments, the insurance company agrees to provide income, typically starting either right away or at some point in the future — often for the rest of your life. You can think of it a bit like creating your own personal pension.

Annuities aren't a new idea, either — the concept dates back to ancient Rome, where they were used to provide income to retired soldiers. The goal has always been the same: convert savings into income you can count on once you stop earning a paycheck.

Fixed and Fixed Indexed Annuities Are Contracts, Not Investments

This distinction matters. Fixed and fixed indexed annuities aren't directly invested in the market, even though some may credit interest based on market performance. Instead, they're contracts between you and the issuing insurance company — and any guarantees they offer are backed by that company's claims-paying ability, not by market returns.

That structure is exactly what allows these annuities to offer a more predictable income stream, which can help address one of the biggest worries in retirement: outliving your savings.

Why Retirees Consider Annuities

A major concern for people approaching retirement is what's sometimes called sequence-of-returns risk — the danger of withdrawing money from retirement accounts early in a market downturn, which can drain those accounts faster than they can recover.

A fixed indexed annuity can help address that risk by offering a guaranteed lifetime income option, protecting principal and income even through a market downturn. This can also add flexibility elsewhere in a portfolio — since a portion of income is already protected, other assets can stay invested with more room to ride out market ups and downs. Some annuities also offer a cost-of-living adjustment (COLA) option to help address inflation over time.

Not All Annuities Are the Same

This is the part that trips people up. There are several different types of annuities, and they don't all offer the same features or protections. Variable annuities, for example, are directly invested in the market and carry market-level risk — very different from a fixed or fixed indexed annuity. Insurance companies also continue to design new annuity products with different features every year, which is exactly why it helps to have someone walk you through the differences rather than shopping by name alone.

Have questions about annuities, or how to generate more predictable income in retirement? We're happy to talk it through — no pressure, just clarity.