An annuity is a contract with an insurance company, not an investment you buy and sell like stocks or bonds

You give the insurance company a lump sum of money now, and they promise to pay you a fixed amount each month for the rest of your life, or for a set number of years. That's the basic trade: you exchange liquidity and control for a may provide income stream. Whether that trade makes sense depends entirely on your situation, your age, and what you need the money to do.

An annuity is not inherently good or bad. It solves a specific problem — the risk that you will outlive your savings — but it creates other problems in exchange. You lose access to your money. You pay fees that reduce what you receive. You give up the chance to leave the full balance to your heirs. The question is whether the problem it solves matters more to you than the problems it creates.

Key Takeaways

  • An annuity converts a lump sum into monthly payments for life, which protects you from running out of money but locks your money away and usually costs 1 to 3 percent per year in fees.
  • Annuities make the most sense if you are over 75, have more savings than you need to live on, and want to convert part of that surplus into may provide income.
  • Annuities rarely make sense before age 60 because you are locking money away for decades and paying fees on money you may not need yet.
  • The monthly payment you receive depends on your age when you buy, current interest rates, and whether you choose a single-life or joint-life payout — shop multiple insurers because rates vary widely.
  • You can buy an annuity with part of your savings and leave the rest in stocks or bonds, so it is not an all-or-nothing decision.

What you actually receive each month, and what determines it

The insurance company calculates your monthly payment based on three things: how old you are, what interest rates are at the time you buy, and how long they expect you to live. A 65-year-old who buys a $100,000 annuity might receive $500 to $600 per month. A 75-year-old buying the same $100,000 might receive $700 to $800 per month, because the insurance company expects to pay out for fewer years.

Interest rates matter enormously. When rates are high, insurance companies can invest your money at higher returns, so they pay you more per month. When rates are low, they pay less. This means the same $100,000 might buy you $450 per month in one year and $550 per month two years later, depending on what happened to interest rates in between.

You also choose whether the payment stops when you die (single-life annuity) or continues to a spouse or beneficiary (joint-life annuity). A joint-life payout is lower each month because the insurance company expects to pay for two lifespans instead of one. If you choose a joint-life annuity and your spouse dies first, your payment does not increase — you keep receiving the same reduced amount for the rest of your life.

The fees and costs that reduce what you keep

An annuity is not free. The insurance company charges fees that come out of your money before you receive your monthly payment. These fees typically range from 1 to 3 percent per year of your account balance, though some annuities charge more. On a $100,000 annuity, that means $1,000 to $3,000 per year disappears before you see a dime.

Some annuities have surrender charges — penalties if you try to withdraw your money in the first 5 to 10 years. These can be 5 to 10 percent of what you withdraw. If you buy an annuity and then face a medical emergency that requires money, you may be stuck paying a large penalty to access your own cash.

You should always ask for the fee schedule in writing before you buy. Compare the same annuity from multiple insurance companies, because rates and fees vary significantly. A difference of 0.5 percent per year in fees means hundreds of dollars per year in your pocket or theirs over a decade.

When an annuity actually solves a real problem

An annuity makes the most sense if you are older than 75, have saved more money than you need to live on, and want to convert part of that surplus into income you cannot outlive. If you have $500,000 saved, spend $40,000 per year, and are worried that you might live to 95 or 100, an annuity can turn $100,000 of that surplus into $700 to $800 per month of may provide income. That solves the problem: you know you will not run out of money.

An annuity also makes sense if you are the sole earner in a household and your spouse would struggle financially if you died. A joint-life annuity ensures your spouse receives income for the rest of their life, which is a form of insurance you cannot buy any other way.

An annuity does not make sense if you are under 60, because you are locking money away for 30 or 40 years and paying fees on money you may not need yet. It does not make sense if you have only modest savings and might need access to that money for medical bills or emergencies. It does not make sense if you have no dependents and do not care whether anything is left when you die — in that case, you can spend down your savings at your own pace and keep full control.

How an annuity compares to other ways to create income

You could instead keep your money in a mix of stocks and bonds, withdraw 3 to 4 percent per year, and let the rest grow. This keeps your money liquid, lets you leave it to heirs, and costs far less in fees. The trade-off is that you have no may provide — if the market crashes the year you retire, your withdrawals might not be sustainable.

You could buy Treasury bonds or high-yield savings accounts that pay 4 to 5 percent per year, which gives you may provide income without locking your money away. The trade-off is that the income stops when you die, so you need enough savings to last your whole life.

You could delay claiming Social Security until age 70, which increases your monthly benefit by 24 to 32 percent compared to claiming at 62. This is a form of annuity that the government provides, and it usually offers better value than a private annuity because the government does not charge fees and uses mortality tables that favor you.

Many people use a combination: they claim Social Security at 70, keep most of their savings in stocks and bonds for flexibility and growth, and buy a small annuity with part of their surplus to cover essential expenses they cannot afford to cut. This spreads the risk instead of betting everything on one approach.

Questions to ask before you buy

Ask the insurance company for the full fee schedule in writing, including annual fees, surrender charges, and any fees for changing your payout option. Ask what the monthly payment would be if you bought today, and what it would have been one year ago, so you can see how interest rates affect the offer.

Ask whether the annuity is fixed (your payment never changes) or variable (your payment changes based on how the insurance company's investments perform). Fixed annuities are simpler and more predictable. Variable annuities have higher fees and more risk.

Ask what happens if you die in the first year. Some annuities return your unused balance to your heirs; others keep it. Ask whether you can withdraw money early and what the penalty is. Ask whether the payment increases with inflation or stays flat. A flat payment loses purchasing power over 20 or 30 years.

Do not buy from a salesperson who pressures you or uses urgency. Do not buy because someone told you it is the only safe choice. Do not buy because you are afraid of the stock market. Buy only if you have thought through what problem you are solving and whether an annuity is the cheapest way to solve it.

Frequently Asked Questions

Can I get my money back if I change my mind?

Most annuities have a surrender period of 5 to 10 years during which you can withdraw your money but pay a penalty, usually 5 to 10 percent. After the surrender period ends, you can withdraw without penalty, but you lose the may provide income stream. Once you start receiving monthly payments, you cannot get the lump sum back.

What if I die before I receive all my money back?

That depends on the type of annuity. Some annuities may provide a minimum payout — if you die after receiving only half your money back, your heirs receive the other half. Others do not — the insurance company keeps what you did not receive. Always ask about this before you buy, because it affects whether an annuity is a good deal for your family.

Do I have to buy an annuity all at once?

No. You can buy a small annuity now and another one later if interest rates improve. You can also buy an annuity with part of your savings and leave the rest in stocks or bonds. This approach lets you create some may provide income without locking away all your money.

Is an annuity the same as a pension?

A pension is an annuity that your employer or a union provides. You do not buy it; they pay you from a fund they manage. An annuity is one you buy yourself from an insurance company. The income works the same way, but you have control over whether to buy an annuity, whereas a pension is usually set by your employer.

Should I buy an annuity if I have a pension?

Probably not, unless you have substantial savings beyond what your pension covers. A pension already solves the problem of may provide lifetime income. An annuity would be paying twice for the same protection and costing you fees in the process.