Annuity

An annuity is a contract, usually with an insurer, that pays a stream of income for a set period or life.

Why investors care

It is a common tool to turn savings into guaranteed retirement income.

Where people go wrong

Fees and inflexibility are real trade-offs; inflation can erode fixed streams.

In the real market

A 70-year-old converts $250,000 into a fixed annuity paying $1,600 a month for life. The income is guaranteed, which is exactly what the retiree wants — no market risk, no decisions. Twenty years later, inflation has halved the purchasing power of that $1,600, and the retiree’s other savings are gone. The annuity delivered certainty but not protection. The scenario is the annuity trade-off in one line: you trade upside and inflation protection for a guaranteed, predictable floor.

Using it in practice

Treat an annuity as a pension-like floor, not the whole portfolio. Compare the quoted payout against what a diversified withdrawal plan could deliver, and read the fee schedule, especially for variable products.

Example in numbers

Key takeaway

An annuity trades a lump sum for a guaranteed income stream, removing the risk of outliving your savings — and the price is fees, inflexibility, and inflation erosion. Fixed payments buy less every year prices rise, and surrender charges punish early exits. Treat an annuity as a pension-like floor for the essential part of retirement income, not the whole portfolio, and compare the quoted payout against what a diversified withdrawal plan could deliver. Certainty has a cost; know it before you pay it.

Definitions reviewed by the Investing Glossary editorial team.