Retirement Planning

A Beginner's Guide to Annuities

Published on September 10, 2025

As you approach retirement, one of the primary financial goals is to convert your accumulated savings into a reliable stream of income that can last for the rest of your life. An annuity is a financial product specifically designed to help achieve this goal.

What is an Annuity?

An annuity is a contract between you and an insurance company. In its simplest form, you make a payment (or a series of payments), and in return, the insurer agrees to make periodic payments to you for a specified period or for the rest of your life. This creates a predictable income stream, which can be a cornerstone of a secure retirement plan.

The Two Main Phases of an Annuity:

• Accumulation Phase: This is the period when you are funding the annuity. You make payments into the account, and the money grows on a tax-deferred basis.
• Payout (Annuitization) Phase: This is when the insurer begins making payments back to you. You can typically choose the frequency of these payments (e.g., monthly, quarterly, or annually).

Calculating the Future Value of an Annuity

The growth of an annuity during the accumulation phase can be calculated with the future value formula for an ordinary annuity:

FV = P * [((1 + r)^nt - 1) / r]

Where:

• FV is the future value of the annuity.
• P is the periodic payment amount.
• r is the interest rate per period.
• n is the number of compounding periods per year.
• t is the number of years.

Is an Annuity Right for You?

Annuities can be a great tool for those seeking a guaranteed income stream in retirement and who are concerned about outliving their savings. However, they can also come with fees and may have less liquidity than other investment products. It's essential to understand the terms of any annuity contract and consider how it fits into your overall financial plan. Consulting with a financial advisor is always recommended.