Annuity.
In plain English
An annuity is a contract between you and an insurance company. You hand over a lump sum (or stream of payments), and in exchange the insurer promises to pay you back over time, often for the rest of your life. Annuities come in a wide range of complexity. A simple single-premium immediate annuity (SPIA) is one of the cleanest income-for-life trades available. A variable annuity with riders, surrender charges, and embedded mutual funds is often one of the most expensive products in retail finance, with all-in fees of 3% or more per year.
01Why it matters
Annuities solve the longevity problem (the risk you outlive your savings) by transferring it to an insurance company in exchange for a lower expected return. For a portion of retirement assets, that trade can make sense. Where annuities go wrong is when they are sold (heavily) to people who do not need them, because annuity commissions are some of the highest in the industry.
02The math, step by step
A 65-year-old buys a $200,000 single-premium immediate annuity in 2024. The insurer pays about $1,300 a month for life, regardless of how long the retiree lives. If they live 25 more years, the total payments are about $390,000. If they live 5 years, the total is $78,000 and the insurer keeps the difference.
03What this is NOT
A pension is a retirement benefit from an employer, often with cost-of-living adjustments and survivor protections. An annuity is a private contract with an insurance company that you buy yourself. They both produce monthly income but the source and terms differ.