Annuities can be intricate financial products. Let’s explore the three primary types of annuities, their workings, and where to acquire them.

Many Americans are apprehensive about outliving their retirement funds. A survey by the Alliance for Lifetime Income revealed that 80% are concerned their savings won’t suffice.

It’s no surprise that 83% believe all workers should have a pension to enjoy independence and peace in retirement, according to the National Institute of Retirement Security. While universal pension benefits remain unlikely, there's a financial solution available: annuities can provide a consistent income stream that lasts a lifetime without needing legislative changes or investments in high-risk assets.

We can tackle this issue with the financial tools we have today. Interest in annuities is on the rise; in the first three quarters of 2025, annuity sales reached $347 billion, marking a 4.4% increase from the same period in 2024.

Nonetheless, understanding annuities can be challenging. Here’s an overview of the main types to help you begin.

WHAT IS AN ANNUITY?

In essence, an annuity is a financial agreement between you and an insurance firm. Primarily focused on retirement, they provide a reliable income during retirement and are unique in ensuring a guaranteed income stream for life, even if you exhaust your initial investment,” explains Minji Ro, Chief Strategy Officer at Gainbridge, an annuity provider.

When you purchase an annuity, you pay the insurer a lump sum (or multiple payments), and in return, they promise to disburse a fixed amount regularly for a designated period or for your lifetime. Payout calculations may be based on your life alone or on you and your partner's lives. Additionally, many annuities allow structuring so that your beneficiaries may receive part of your investment if you pass away within a specified period, although this feature typically incurs higher costs.

These principles apply to all annuities. Let's examine three distinct types, progressing from the simplest to the most complex and risky.

FIXED ANNUITIES

Fixed annuities are the most straightforward type. You provide a set amount to the insurance firm, and they return a consistent paycheck. Ro likens them to a bank CD: “You choose a time frame and interest rate, locking in those terms.” Similarly, fixed annuities depend on factors like current interest rates and the duration of your payouts based on your life expectancy.

“There are notable differences between fixed annuities and CDs,” she adds. First, you deal with an insurance company rather than a bank, subjecting you to different regulations. Second, growth in an annuity is tax-deferred, unlike a CD. Lastly, most annuities allow you to access a portion—often up to 10%—of your initial investment, though they shouldn't be seen as liquid assets. Treat this money as long-term savings.

FIXED INDEX ANNUITIES

Next are Fixed Index Annuities (FIAs), where your returns hinge on a market index, typically the S&P 500, although you have various indices to choose from. “The term ‘fixed’ indicates your principal remains protected,” Ro explains. However, the exact returns remain uncertain at the outset.

Since these annuities are linked to the market, they can offer higher returns during positive market performance, but if the index falters, returns could be zero. You won't lose your principal, but you might not gain anything either. “This trade-off is essential to grasp,” she notes. While there are detailed aspects worth investigating, this encapsulates the idea.

VARIABLE ANNUITIES

Lastly, variable annuities allow you to invest in mutual funds (known as sub-accounts) wrapped in insurance. With these, the value of your annuity fluctuates based on your chosen mutual funds, and unlike fixed options, your principal is not safeguarded.

THE MOST COMMON ANNUITY OF ALL

Interestingly, many might not realize that they are already familiar with annuities. According to Jason Fichtner, Chief Economist at the Bipartisan Policy Center, “Social Security functions as an annuity and is the most inflation-protected option available.” Many should consider delaying Social Security to secure a higher monthly benefit. An annuity can supplement your income alongside Social Security payments.

If you think an annuity could benefit you, consider discussing it with your financial advisor or exploring options within your retirement plan. You can also purchase directly from providers like Gainbridge, where you can also calculate your potential lifetime income based on your investment.