An annuity is a contract between you and an insurance company. It is designed to protect and grow your money, and then provide a stream of income during your retirement. In fact, other than pensions, annuities are the only products that provide guaranteed lifetime income.
Annuities typically have two phases – an accumulation phase and an income phase. During the accumulation phase, the money you contribute to your annuity can earn interest. During the income phase, the money you’ve accumulated in your annuity can be turned into a stream of income payments.
Annuities can be flexible or single premium. Flexible premium annuities allow you to contribute multiple purchase payments, while a single premium annuity is purchased with a lump-sum purchase payment.
What an annuity isn’t
It’s important to keep in mind that an annuity is:
- Not ownership of shares of any individual stock, index fund or mutual fund
- Not a bond or a certificate of deposit (CD)
- Not insured by the FDIC like a bank CD or a checking or savings account. Annuity guarantees are backed by the financial strength of the issuing insurance company.
- Not available for “instant access” like a bank account. While a portion of your money is available each year for a penalty-free withdrawal, an annuity should be used as part of your long-term retirement plan