An annuity is a financial product that provides a fixed stream of income over a specific period of time. It is typically used as a retirement savings vehicle and is sold by insurance companies.

When you purchase an annuity, you make a lump sum payment or a series of payments to the insurance company. In return, the insurance company promises to provide you with regular income payments either immediately or at a future date. The income payments can be fixed or variable, depending on the type of annuity.

There are several types of annuities, including fixed annuities, variable annuities, indexed annuities, and immediate annuities. Fixed annuities provide a guaranteed income for a specific period of time, while variable annuities allow for investment in various funds and offer the potential for higher returns. Indexed annuities are tied to a specific index, such as the S&P 500, and provide returns based on the performance of the index. Immediate annuities start providing income payments immediately after purchasing.

Annuities offer several benefits, including tax-deferred growth, guaranteed income payments, and the potential for higher returns. They can provide a steady stream of income during retirement and serve as a way to supplement other retirement savings. Additionally, annuities can offer protection against market volatility and longevity risk.

While annuities have their benefits, they also come with some drawbacks. One of the main drawbacks is the lack of liquidity. Once you purchase an annuity, it can be difficult to access your funds without incurring penalties or surrender charges. Additionally, annuities can have high fees and expenses, which can eat into your returns. It’s important to carefully consider the terms and conditions of an annuity before purchasing.

Annuities can be a suitable option for individuals who are looking for a guaranteed income stream during retirement and want to protect against market volatility. They can also be beneficial for those who have maxed out contributions to other retirement accounts, such as 401(k)s and IRAs, and are looking for additional tax-deferred savings options. However, it’s important to consult with a financial advisor to determine if an annuity is the right fit for your financial goals and situation.