What You Should Know About Annuities

Money Girl listener Marsha U. writes: "I work at a university, so my retirement is through TIAA. When I recently spoke to their rep, she suggested an annuity with half a variable product. I'm 65 years old and will retire at 70, so I have some time to decide. Can you explain what I should know about annuities?"

Thanks for your question, Marsha! Annuities can be a wise way to save for retirement if you fully understand them. So, I'm delighted you asked. This episode will review how annuities work, the different types, and how they relate to saving enough for a comfortable retirement.

What Is an Annuity?

Annuities have been around for a long time and are commonly used by retirees who want to make sure they'll have a regular income for the rest of their lives. Since getting a big, fat pension from your employer is a luxury that fewer American workers can look forward to, an annuity may complement other retirement plans you have.

In its simplest form, an annuity is a contract between you and an insurance company that provides a combination of insurance and investment features. 

In its simplest form, an annuity is a contract between you and an insurance company that provides a combination of insurance and investment features.

Annuities are sold by various institutions and professionals, such as insurers, banks, brokerages, and financial advisors. The investment firm that manages Marsha's retirement, TIAA, is one of the largest pension funds in the U.S. They manage retirement accounts for workers in many fields, including universities, government, nonprofits, and medical services.

To purchase an annuity, you make one or multiple payments in exchange for a set amount of income for a period. Depending on what type of annuity you select, it may give you the following benefits:

• Guaranteed income for your entire life
• Tax-deferred growth
• Guaranteed investment return
• Protection from investment losses
• Flexible withdrawals
• Protection for your beneficiaries

One advantage of an annuity is that you can contribute as much as you want for retirement, provided you have a non-qualified annuity (I'll get more into that later). Unlike other tax-deferred vehicles, such as a workplace 401(k) or an IRA, annuities have no annual contribution limits. That can be particularly helpful if you're close to retirement age and need to catch up. 

How Do Annuities Work?

As I...

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