For retirees seeking dependable income with less exposure to market swings, annuities are often part of the conversation, but they’re not always well understood. At their core, annuities are contracts with insurance companies. You contribute a sum of money, and in exchange, the insurer commits to providing income under specific terms. Depending on the type of annuity, those payments may begin soon after purchase or later in retirement.

Most annuities operate in stages. Initially, funds are added to the contract during a growth period commonly referred to as accumulation. Later, based on the rules set in the contract, the annuity may transition into an income phase, where payments are distributed according to a predetermined schedule. While this structure can create predictability, annuity contracts often contain important details around access, fees, timing, and guarantees that aren’t immediately obvious.

Not all annuities are built the same. Some are designed for stability, offering fixed returns and predictable income. Others are linked to market performance, allowing for higher potential growth but with increased risk. There are several types of annuities, each designed for different goals and risk tolerances.

Fixed annuities offer a guaranteed rate of return, providing stability and predictability, though typically at lower growth potential.

Variable annuities invest your money in market-based subaccounts, which may offer higher growth opportunities but also expose your savings to market risk.

Other annuity structures exist as well, each with unique benefits, limitations, and trade-offs.

Understanding how these options work and which may align with your retirement goals is essential before committing your assets.