Annuities

An annuity is a contract you make with an insurance company: you give them a lump sum today (or a series of payments), and in return they guarantee you an income stream — for a set number of years, or for the rest of your life.

It’s the oldest answer to the oldest retirement question: what if I outlive my money? An annuity is how you stop asking.

Why annuities matter now

Pensions used to do this work. A generation ago, a lot of American workers retired with a company pension that sent a check every month until they died. Most people today don’t have that. What they have is a 401(k), an IRA, maybe some Social Security, and the nagging math of trying to figure out how much they can safely spend each year without running out.

Annuities are a tool for converting a pile of savings into a paycheck — something predictable you can budget around, that won’t stop because the market had a bad decade.

The main types, in plain English

There are a lot of flavors, but most families I work with end up looking at one of these:

• Fixed annuities — The simplest. The insurance company guarantees a specific interest rate for a specific period, and a specific income amount when you start taking withdrawals. Predictable, low-stress, no market risk.
• Fixed indexed annuities — Your principal is protected from market losses, but your growth is linked to a stock-market index (with a cap). You give up some upside in exchange for a floor. Popular with people who want growth potential but can’t stomach another 2008.
• Immediate annuities (SPIAs) — You hand over a lump sum, and income starts right away — usually within a month. A direct way to turn savings into a paycheck, often used at or near retirement.
• Deferred income annuities — You buy it now, income starts later (e.g., at 70 or 75). Often used to hedge longevity risk — “what if I live to 95?”

Variable annuities exist too, but they come with higher fees and more complexity. I’ll only bring them up if they genuinely fit.

Who an annuity tends to help

• Pre-retirees with a lump sum to protect — e.g., a pension rollover, a 401(k) distribution, an inheritance — who want the principal guaranteed and a clear picture of retirement income.
• Retirees seeking income predictability — people who want the utility bill, the grocery bill, and the property tax bill covered by a source that doesn’t care what the market did this quarter.
• Anyone worried about longevity risk — the risk of living longer than your money lasts. Annuities are the only financial product that specifically addresses this.
• Savers already maxing other tax-deferred accounts — annuities grow tax-deferred and have no annual contribution limit.

Where I’m careful

Annuities aren’t right for everyone. Common places they get oversold:

• If you need liquidity, most annuities have surrender charges for the first several years. If there’s a real chance you’ll need that lump sum back, an annuity is the wrong vehicle.
• If you’re young, you usually have better places to put long-term dollars — employer match, Roth IRA, low-cost index funds — before an annuity makes sense.
• If the commission is the main reason you’re hearing about it, walk away. Some products pay agents a lot. I’ll always tell you what I’m compensated for and why I think the specific product fits.

How we figure out if it’s right

One phone call, no commitment. Bring:

• What you already have saved (rough numbers are fine)
• Your Social Security estimate
• When you hope to retire, and what your expected monthly spending looks like
• Any pensions or other income sources

I’ll sketch out what your retirement income looks like with and without an annuity, which type might fit, and what it would cost. If the answer is “you don’t actually need one,” I’ll say that.

— Jorge Galindo, founder of Covenant Life Group. Iraq War veteran. Licensed life insurance agent. More about Jorge →