An annuity is an insurance product that can provide income, growth or a degree of protection against investment losses, depending on how it is structured. In exchange for a lump-sum payment or a series of contributions, the insurance company agrees to provide future income payments or grow your savings over time under the terms of the contract.
The variety of annuity structures can make them more complex than other fixed-income products. “While CDs and Treasurys typically offer a guaranteed interest rate for the term, annuities can come in many different forms,” says Bryan Kuderna, a certified financial planner in Shrewsbury, New Jersey, and host of “The Kuderna Podcast.”
[Read: 2026 Guide: Pros and Cons of Annuities]
Types of Retirement Annuities
Here is a look at the different types of annuities, including how they generate returns and provide income.
Fixed Annuity
A fixed annuity offers a guaranteed interest rate or predictable payout. This can appeal to retirees or conservative investors who prioritize stability over market exposure.
Because fixed annuities share some characteristics with other low-risk savings and income products, they are often compared with certificates of deposit and bonds when evaluating liquidity and access to funds.
“Fixed annuities may have surrender charges if the client liquidates their annuity before the term is up, whereas CDs might have early withdrawal penalties,” Kuderna says. “Bonds may not have a penalty, but their redemption value is often based on prevailing rates.”
Variable Annuity
A variable annuity invests in market-based subaccounts, which are investment options inside an annuity that function similarly to mutual funds and may hold stocks, bonds or other assets. Returns and future income depend on the performance of those underlying investments.
These products may offer higher upside potential, but they can also come with higher fees, particularly if optional riders for guaranteed income or death benefits are included.
These products may offer higher upside potential, but they can also carry more fees, particularly if optional riders or death benefits are included.
Fixed Indexed Annuity
A fixed indexed annuity links its returns to the performance of a market benchmark, such as the S&P 500 index, rather than investing directly in the market. It typically offers some downside protection, meaning there is a minimum guaranteed return floor even if the index performs poorly.
Registered Index-Linked Annuity
Registered index-linked annuities, or RILAs, combine features of variable and indexed annuities.
A RILA is tied to market performance but uses guardrails to limit some downside exposure. In exchange, investors may accept capped gains or structured risk.
RILAs may appeal to investors who want some exposure to market gains but with more built-in protection than investing directly in the stock market.
Multi-Year Guaranteed Annuity
A multi-year guaranteed annuity, or MYGA, is a fixed annuity that locks in a guaranteed interest rate for a set term, often three to 10 years. This type of annuity may have surrender charges and specific liquidity rules.
Immediate Annuity
An immediate annuity begins paying income soon after a lump-sum investment, often within 30 days to 12 months.
Retirees may turn to immediate annuities if they want dependable income for life or over a fixed period.
Deferred Annuity
A deferred annuity delays income payments until a future date. This allows funds to accumulate before withdrawals begin.
Types of Annuities Compared
| Type of Annuity | Typical Use Case | Rate/Return Structure | Liquidity | Best For |
| Fixed annuity | Stability and guaranteed growth | Fixed interest rate | Moderate to limited | Conservative savers |
| Variable annuity | Long-term growth | Market-based returns | Limited | Higher-risk investors |
| Fixed indexed annuity | Protected growth | Index-linked with caps | Limited | Moderate-risk investors |
| RILA | Structured market exposure | Index-linked with guardrails | Limited | Investors comfortable with partial downside risk |
| MYGA | CD alternative | Guaranteed rate for set term | Limited | Short- to mid-term conservative savers |
| Immediate/income annuity | Retirement income | Guaranteed payouts | Low | Retirees needing dependable income |
| Deferred annuity | Long-term growth | Delayed payments | Limited | Investors focused on savings growth before income begins |
Benefits of a Retirement Annuity
Annuities can help transfer some retirement risks
to an insurance company.
For retirees concerned about outliving their savings, guaranteed lifetime income can provide financial stability. Some investors also use annuities to diversify beyond traditional stock-and-bond portfolios.
Tax deferral is another advantage. In many cases, gains within an annuity are not taxed until distributions begin.
[Read: What Is a Good Monthly Income in Retirement?]
Drawbacks of a Retirement Annuity
Annuities can be complex and often involve fees and restrictions.
Some products, especially variable annuities, may include administrative fees, rider charges and investment-related costs.
Liquidity can also be an issue. If you may need access to capital for emergencies or flexibility, an annuity may not always be the right fit.
Annuities Inside 401(k)s Under SECURE 2.0
For many workers, 401(k) plans may be their first introduction to annuities.
Under the SECURE 2.0 Act and earlier retirement-plan changes, annuity options have appeared in more employer-sponsored retirement plans. While workers may consider these, it is also necessary to understand fees, payout structures and whether the annuity aligns with their retirement strategy.
Questions to Ask Before Buying an Annuity
Before purchasing an annuity, ask:
— What financial goal is this annuity helping achieve?
— How long is the surrender period?
— What fees or rider costs apply?
— How easily can I access my money?
— Is the annuity designed for growth, income or preservation?
— What happens if interest rates change?
— How financially strong is the insurance company?
— Would another option, such as bonds, CDs or diversified investments, also help me reach my goal?
[READ: 10 Essential Sources of Retirement Income]
Are Annuities a Good Investment for Retirees?
Whether an annuity is a good fit depends on a retiree’s unique goals, risk tolerance, liquidity needs and retirement timeline.
“The most important thing a prospective annuity client should understand before signing is the term of the annuity and any associated surrender schedule,” Kuderna says. “This is where retirees can run into issues if they lock up significant assets and lose liquidity for unexpected emergencies. They should also be aware of any fees, particularly on variable and index annuities or any with income riders attached. ”
One of the best ways to evaluate whether an annuity belongs in your retirement plan is to determine what purpose it would serve. If it supports a need such as guaranteed income, it may be useful. If not, another option could be a better fit.
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What Is a Retirement Annuity? originally appeared on usnews.com
Update 06/02/26: This story was published at an earlier date and has been updated with new information.
