How Annuities Work — and Why They Matter for Retirement Income

One of the most significant risks in retirement is longevity risk — the possibility of outliving your savings. Annuities are specifically designed to address this risk by converting a lump sum into a guaranteed income stream, either for a defined period or for the rest of your life.

The Basic Structure

An annuity is a contract between you and an insurance company. You make a payment — either a single lump sum or a series of contributions — and in return, the insurer agrees to make regular payments to you beginning at a future date (deferred annuity) or immediately (immediate annuity).

Types of Annuities

Fixed annuities offer a guaranteed interest rate during the accumulation phase and predictable income payments. They are the most conservative option and are well-suited for clients who prioritize certainty over growth potential.

Fixed indexed annuities (FIAs) credit interest based on the performance of a market index, with a floor that protects against loss. They offer more growth potential than fixed annuities while maintaining downside protection.

Variable annuities allow you to invest in sub-accounts similar to mutual funds. Returns are not guaranteed and can fluctuate with the market, but the growth potential is higher. Many variable annuities include optional riders that guarantee a minimum income regardless of market performance.

The Income Rider

Many modern annuities include an income rider — an optional feature that guarantees a minimum withdrawal benefit, often growing at a set rate each year until you begin taking income. This can be a powerful planning tool, allowing you to lock in a future income floor while your assets continue to grow.

Where Annuities Fit in a Retirement Plan

Annuities are not right for every client or every dollar. They are most valuable when used to cover essential expenses in retirement — the baseline income you need regardless of market conditions. Social Security covers some of this, but an annuity can fill the gap between Social Security income and your actual monthly needs, giving you the confidence to let your other assets grow.