A fixed sum of money paid to an individual each year
Why It's Important
Annuities can be an effective retirement income strategy. They are created and sold by financial institutions. But, how do they work? Let me explain. The financial institution takes your money and invests it. You pay into it every so often (monthly, quarterly, yearly, etc.) during the accumulation phase. Once the funds enter the annuitization phase, the financial institution starts paying the you funds from that "bucket" of money. The annuitizaion phase is agreed upon in the contract between the you and the financial institution.
Annuities were made to provide people with a steady stream of income. Some common annuities are defined pension benefits and social security. Also, if I win the lottery tomorrow (let us pray), I can opt for an annuity or a lump sum. The annuity will pay out a certain amount every year until I die.