Annuities are one of the most misunderstood financial products available — but they're also one of the most powerful tools for securing retirement income. This guide explains exactly what an annuity is and how it works, in plain English.
What is an Annuity?
An annuity is a contract between you and an insurance company. You make a payment — either a lump sum or a series of payments — and in return, the insurer promises to pay you a regular income stream, either immediately or starting at a future date.
Think of it as a personal pension you create yourself. No matter how long you live, the income payments continue. It's the only financial product that can guarantee you will never outlive your money.
💡 An annuity is essentially the opposite of life insurance. Life insurance protects against dying too soon. An annuity protects against living too long — and running out of money.
How Does an Annuity Work?
An annuity has two phases:
Accumulation Phase
You fund the annuity with a lump sum or series of payments. During this phase, your money grows tax-deferred — meaning you don't pay taxes on earnings until you start withdrawing. Depending on the type of annuity, your money may grow at a fixed rate, linked to a market index, or invested in market sub-accounts.
Distribution Phase
When you're ready — typically at retirement — you begin receiving income payments. You can choose payments for a set period of time or for the rest of your life (and your spouse's life). The insurer guarantees these payments regardless of how long you live or what markets do.
Types of Annuities
Fixed Annuity
Earns a guaranteed, fixed interest rate during the accumulation phase. The most straightforward and predictable type. No market exposure whatsoever.
Fixed Indexed Annuity (FIA)
Growth is linked to a market index like the S&P 500, with a floor that protects against losses. The most popular type today — offering growth potential with downside protection.
Multi-Year Guaranteed Annuity (MYGA)
Similar to a CD — a fixed interest rate locked in for a set number of years (typically 3–7 years). Often offers higher rates than traditional savings accounts or CDs.
Who Are Annuities For?
- Pre-retirees within 10–15 years of retirement who want to secure income
- Retirees who want guaranteed income to supplement Social Security
- Anyone who is worried about outliving their savings
- Conservative savers who want predictable, protected growth
- Business owners without employer pension plans
What Are the Downsides?
- Surrender charges — most annuities have a surrender period (typically 5–10 years) during which early withdrawals incur a penalty
- Liquidity — annuities are designed for long-term income, not short-term access to cash
- Complexity — there are many types and variations; working with a knowledgeable agent is important
- Fees — some annuities carry internal fees; Fixed and FIA products tend to have lower costs
Want to see what an annuity could do for your retirement income? Our licensed agents will compare products across top carriers and show you exactly what guaranteed income you could receive — at no cost to you.
Ready to Secure Your Retirement Income?
Talk to a licensed Eterna agent and get a free annuity comparison across top carriers.