FAQs About Annuities

An annuity is a contract with an insurance company. You contribute money (either as a lump sum or over time), and the contract can help you grow savings, protect principal (depending on the type), and/or create a stream of income—often intended for retirement.

“Safe” depends on the type of annuity and what you mean by safety. Many fixed and fixed indexed annuities are designed to reduce market volatility exposure and may offer contractual guarantees backed by the claims-paying ability of the insurer.

• Fixed annuities generally credit a stated rate.
• Fixed indexed annuities typically link interest credits to an index formula (caps/participation/spreads vary), often with principal protection features.
• Variable annuities involve market risk and may include fees and optional riders.

Most annuities fall into these categories:

• Fixed annuity: credits an interest rate set by the insurer for a period of time.
• Fixed indexed annuity (FIA): potential interest is based on an index formula (caps/participation/spreads vary), often with principal protection features.
• Variable annuity: value can rise/fall with underlying investments; typically has market risk and fees.
• Immediate annuity: designed to convert a lump sum into income that starts quickly.
• Deferred income annuity: income begins later (for example, at a chosen retirement age).

Some annuities provide income by annuitizing (turning a value into a payment stream), while others use income riders that define how income may be calculated based on contract rules. Income can be structured for a set period, a lifetime, or joint lifetime for couples—depending on the product.

Many annuities are designed as longer-term vehicles. A surrender charge is a fee that may apply if you withdraw more than the contract’s penalty-free amount during the surrender period. Schedules vary by product and often decline over time.

• Most contracts include a free withdrawal feature (commonly a percentage each year—varies by contract).
• Withdrawals may also have tax implications depending on the annuity type and your age.

Many annuities grow tax-deferred, meaning you typically don’t pay taxes on gains until you withdraw. Tax rules can differ based on whether the annuity is held in a qualified account (like an IRA) or a non-qualified account.

Annuities are often considered when someone wants more predictable income, a portion of savings positioned for stability, or a strategy designed to help reduce sequence-of-returns risk. They can also be used to “pensionize” part of retirement income.

• Pre-retirees seeking a clearer retirement paycheck plan
• Retirees wanting to stabilize income alongside Social Security
• Households prioritizing principal protection for a portion of assets

Key items we evaluate together often include:

• Time horizon: when you may need the money and how long you want the strategy in place
• Liquidity: penalty-free withdrawals and surrender schedule details
• Income objectives: lifetime income needs, joint income options, riders and costs
• Crediting method: fixed rate vs. indexed crediting terms (caps/participation/spreads)
• Fees and expenses: product costs and optional rider charges
• Insurer strength: financial ratings and claims-paying history

Not always. Annuities are tools—useful in certain situations, less appropriate in others. The right recommendation depends on your cash flow, timeline, liquidity needs, risk tolerance, and how the annuity would fit with your broader retirement income strategy.