Annuities explained in plain English — growth, income, and everything between
Annuities 101: What They Are, How They Work
Whether you're looking to grow savings with principal protection or turn part of your nest egg into guaranteed income you can't outlive, this guide breaks it down without the sales pitch.
Annuities for Growth
Not every annuity is built for income right away. Two of the most common types are designed to help your money grow steadily while protecting it from market downturns.
Fixed Annuities (MYGAs)
A multi-year guaranteed annuity (MYGA) locks in a guaranteed interest rate for a set number of years — similar in concept to a CD, but issued by an insurance company. Many people compare MYGA rates directly against bank CDs when shopping for safe, predictable growth.
Fixed Indexed Annuities
A fixed indexed annuity protects your principal from market losses while crediting interest based on the performance of a market index, subject to caps and terms in the contract. It's designed for people who want some upside potential without direct market risk.
Both product types are commonly used for the portion of a portfolio someone doesn't want exposed to a market downturn — savings earmarked for retirement income a few years down the road, or simply money they can't afford to lose.
Annuities for Guaranteed Income
Other annuities — or optional riders added to a growth annuity — are built specifically to convert a portion of your savings into income you cannot outlive, regardless of how long you live or how markets perform.
Lifetime income riders can turn an accumulation-focused annuity into a stream of guaranteed payments once you're ready to turn on income.
Immediate income annuities begin paying out shortly after you fund the contract, often used by people already at or near retirement.
Deferred income annuities let you lock in a future payout rate today, in exchange for starting income at a later date.
For many retirees, guaranteed income functions like a personal pension — a paycheck that continues no matter what the market does. Social Security, a pension (if you have one), and annuities are the only three sources of truly lifetime income in a typical retirement plan.
Pension vs. Annuity: What's the Difference?
Fewer employers offer traditional pensions today, which is why many retirees look to annuities to recreate that same dependable, monthly paycheck feeling — funded with their own savings instead of an employer.
Pension
Annuity
Who provides it
Employer
You purchase it individually
Funding
Employer-funded
Funded with your own assets
Income structure
Set by employer formula
Based on the contract you choose
Flexibility
Limited
Multiple contract and payout options
Availability
Increasingly rare in the private sector
Widely available through insurance companies
Pensions and annuities aren't the same thing, but they share the same goal: dependable income you can count on. For a deeper comparison, Roots & Wealth has a full breakdown of pension vs. annuity income.
Is an Annuity Right for You?
Annuities aren't a one-size-fits-all answer, and they're not right for every dollar of savings. They tend to make the most sense for people who value principal protection, tax-deferred growth, or the option of guaranteed lifetime income as part of a broader plan that also includes Social Security, investments, and other assets.
The best way to know if one fits your situation is a personalized conversation — not a generic sales pitch.
Is an Annuity Right for Me?
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An annuity is a contract with an insurance company that can help you accumulate money for retirement or provide income later in life. Different annuities serve different purposes, so understanding how they work is essential before making a decision.
What is the difference between a growth annuity and an income annuity?
A growth-focused annuity, like a fixed or fixed indexed annuity, is designed to accumulate value with principal protection. An income annuity is structured to convert savings into a guaranteed stream of payments, often for life. Some contracts can do both, depending on how they're structured.
What is a fixed indexed annuity?
A fixed indexed annuity is designed to protect your principal from market losses while allowing interest to be credited based on the performance of a market index, subject to the terms and limits of the contract.
What is a MYGA (multi-year guaranteed annuity)?
A MYGA is a type of fixed annuity that locks in a guaranteed interest rate for a set number of years, similar in concept to a CD but issued by an insurance company rather than a bank.
Are annuities safe?
Annuities are backed by the financial strength and claims-paying ability of the issuing insurance company, not by the federal government. Choosing a financially strong insurer is an important part of the decision-making process.
Is an annuity the same as a pension?
No. A pension is typically an employer-sponsored defined benefit plan, while an annuity is an insurance contract purchased by an individual and can be structured to work like a personal pension.