Retirement Annuity Guide: Definition, Types, Benefits, and How to Find On

One of the things you can do for your stress-free retirement is to make sure you have enough savings and other income sources to live a comfortable life without sacrificing things and activities you enjoyed before becoming a retiree. 

However, with how unpredictable the market is, as well as the possibility of unexpected global events that could cause you to dive into the money you saved up (just like what we saw happening with the COVID-19 pandemic), that can become a daunting task.
 

Plenty of Americans don’t even have access to employer-provided pensions, and their earnings are not high enough to live life at an acceptable standard.

❗According to data from November 2021 provided by the Bureau of Labor Statistics, only 15% of private sector workers had access to an employer-provided pension, also known as a defined benefit plan.

A solution that is steadily increasing in popularity is annuities – and there are several reasons for that. Read this guide to find out what types of retirement annuities are available and which ones you should consider. 

What Is a Retirement Annuity?

A retirement annuity is nothing more than a contract between a retiree and an insurance company. An annuity contract states that after making an initial investment, be it a lump sum payment or a series of installments, the retiree has the right to receive a guaranteed lifetime income until their death.

Annuities are flexible investment products that can be tailored to your needs, allowing customization of payout duration, interest rates, beneficiaries, riders, and more!

Typically, people purchase an annuity a few years before they are expected to retire and just wait to start receiving payments until it’s time for them to actually go on retirement. However, it’s also possible to do it once you’re already a retiree or are close to being one.
 

📋Is annuity recommended to retirees? While annuities can provide valuable benefits for retirees, they are not exclusively designed for them and can be useful for other investors as well. Various types of annuities are a popular choice for those who want to diversify their portfolio with low-risk investments or ensure a guaranteed stream of income in the future. 

Types of Retirement Annuities

There are three main retirement annuity types – fixed annuity, variable annuity, and fixed indexed annuity.

Fixed Annuities 
📌 Best for: Retirees looking for a safe, predictable income stream with no market risk. Ideal for conservative investors who prioritize security over growth.

With a fixed annuity, you know straight away how much retirement income you can expect – things like the stock market performance will not affect it, so it gives you a clear image of how your financial situation will look once you become a retiree. Instead, your money grows at an interest rate decided on by the annuity provider.

Having said that, fixed annuities are declining due to falling interest rates and may limit the potential growth of your savings. 

Variable Annuities 
📌 Best for: Investors who can tolerate market risk and want growth potential while still having an annuity structure. Suitable for those with other sources of guaranteed income (like Social Security or pensions) and a longer retirement horizon.

A variable annuity, on the other hand, can fluctuate throughout the annuity term. With variable annuities, you have a number of different stocks and bonds in which you can invest your premium (what you paid to receive the annuity later on). Your payout will depend on how the subaccounts you choose perform, which means that you can’t really predict how much you will receive once you start receiving your guaranteed income.

While it is a better option in the sense that it allows you to grow your money when done right, it also comes with a lot more risk, and you might find yourself losing part of your initial investment.
 

Fixed Index Annuities
📌 Best for: Retirees who want higher growth potential than a fixed annuity but without full market risk. Ideal for those seeking moderate growth with safety features.

The final option you have is indexed annuities. Those are fixed annuities with which your initial investment grows along with a stock index associated with it, such as the S&P 500. One of the benefits we need to mention here is that even if the index performs poorly, you will not be losing money. That’s because an index annuity guarantees that the least amount of interest you can earn in a contract year is 0%, even if something as significant as a market crash happens.
 

Overview of Annuities: A Comparison Table

Best Retirement Annuities for Seniors

When choosing an annuity, you should consider not only the type of the product but also its key features, including payout options, riders, charges, and fees. However, when searching the internet, you will likely find paid pages that may not match your ultimate goals. 
 

To make your search much shorter, we’ve selected some of the best products on the market today. For a longer list, check out all the annuity providers reviewed by us.

When Will You Receive Income Payments?

Depending on your specific policy, your income payments begin either within a year of purchase (which is also known as an immediate annuity), or you can decide on deferred income annuities, in which case you can choose at which point your payments will start. It’s important to note, however, that with immediate annuities, a lump-sum payment is required.

A deferred annuity is usually the go-to option for those who still have a few years to go before they are able to retire, while immediate annuities are preferred by those who are on the verge of retiring.

Real-Life Examples of Retirement Annuity

📌 Immediate Annuity Example:

David, age 67, just retired and wants to start receiving a steady income right away. He invests $200,000 into an immediate annuity, which begins paying him $1,000 per month for life within 30 days. This ensures he has a reliable income stream without delay.

📌 Deferred Annuity Example:

Sarah, age 55, is still working but wants to prepare for retirement. She invests $100,000 in a deferred annuity, planning to start payouts at age 65. Over the next 10 years, her annuity accumulates interest, and by the time she retires, her payments are higher than if she had started immediately.
 

What Annuity to Choose: Immediate vs. Deferred

It may be difficult to understand which type of annuity is best: one that pays immediately or one that accumulates interest over the years. 

There is one question you can ask yourself to understand what offer matches your financial situation best:

💰 Do you need income right away?

If yes, it is worth considering an immediate annuity as it starts paying within a year.
 

If not, a deferred annuity may be a better option because it allows you to grow your money tax-deferred.

How Long Will the Payments of Retirement Annuities Last?

That’s another thing you can decide on when it comes to your retirement annuity. You have the option to choose whether you’d like to receive the guaranteed income stream for a specific number of years (period certain annuity) or until your death (lifetime annuity). It’s important to notice that a period certain annuity will pay out for a specific number of years regardless of whether the person who signed the contract is still alive.

Single Life vs. Joint Life Retirement Annuities: Which One is Better?

In addition to choosing the specifics of annuity payouts, you can choose a product designed as a single-life or joint-life annuity. The difference may be clear, but let’s explain in case you’re unsure about certain details.

A single-life annuity is a regular annuity that provides a guaranteed income for life. Unlike a joint or survivor annuity, a single-life one does not factor in a beneficiary, meaning your spouse or child will not continue receiving payments after your passing. 

A joint-life annuity allows you to secure the financial stability of your loved one. Your annuity payments will be allocated to your partner, spouse, or children either as a lump sum or a series of payments. 

👪You can still consider a single-life annuity with a rider (e.g., a death benefit) to ensure your loved ones receive the remaining funds from your annuity. 

What Happens After You Die?
Depending on the retirement annuity you choose, there are a few things that can happen after you die. 

Period-Certain Annuity Payouts
If you opted for a period-certain annuity, as we already mentioned, your retirement annuity will be paid out for the number of years you agreed upon when signing the contract – typically 10 or 20 years. 

If you pass away during that time, the guaranteed monthly income doesn’t stop – instead, the payments go to the beneficiary you named when signing your retirement annuity.

Life Annuity Payouts
If you chose the income for a life annuity, and you die while your annuity is still in the accumulation phase (meaning the payments haven’t begun yet), most insurance companies provide an annuity death benefit to the beneficiary.

Join Annuity Payouts
If you get a joint annuity with your spouse and one of you dies, the other spouse will continue to receive payments until they pass away, too. Depending on the contract, the amount they receive will either stay the same or decrease.

Single Annuity Payouts
Finally, if you are the only one to sign the annuity and you pass away during the payout stage, the payments simply stop – that is, unless you haven’t added a death benefit, in which case the remaining amount will be paid out to your beneficiaries.

Riders to Protect Your Loved Ones
No matter what annuity you choose, you should always be able to add return-of-premium riders to ensure your heirs or partners receive the investment back. 

Hence, it’s of utmost importance to consult with an annuity expert to help you customize your annuity product so that you can maximize the growth of your savings and create a safety net for your family in case of an unfortunate event. 

What Is a Guaranteed Lifetime Withdrawal Benefit (GLWB)?
The guaranteed lifetime withdrawal benefit (GLWB) is a rider that can be added to variable annuities. While you will need to pay an additional fee for it, it protects your investment by ensuring that even if market downturns happen, reducing its cash value, you will still receive the minimum payout level.

Why consider the GLWB?
Among the numerous benefits of the GLWB, preventing the risk of depleting your savings ranks first. So, if you pay extra for this rider, you will continue to receive payments for life, even if the value of your investment reduces. 

Top annuities offering GLWB riders in 2025: 

• Fidelity Personal Retirement
• Brighthouse Shield Level Pay Plus® 
• North American Income Pay Pro(SM) 
• Prudential Premier® Retirement Variable 
• Allianz 222® Annuity

Is a Retirement Annuity Taxable

Annuities grow on a tax-deferred basis, which means that you don’t have to pay taxes on them until you start receiving payments.

Generally speaking, annuities can be divided into two categories – qualified annuities and non-qualified annuities.

• Qualified retirement annuities are annuities that have been founded by pre-tax dollars, usually using an employer-sponsored retirement plan such as an IRA or a 401(k).
• Non-qualified retirement annuities are founded on money that has already been taxed, such as a wage from a job.

So, how is a retirement annuity taxed? Income from an annuity is taxed with an ordinary income tax, meaning that you will pay the same tax on it as you would with any other income.

💲Qualified annuities are taxed on the whole amount you withdraw. For example, if you receive an annual payout of $20,000 from your retirement annuity, the whole $20,000 would be subject to tax.

💲Non-qualified retirement annuities, on the other hand, are only partially taxed – specifically, you only pay taxes on the earning portion of the withdrawal. How much that is, is calculated using an exclusion rate. The way it works is that you take the amount that you invested in the annuity and divide it by the expected payout – the result will be a percentage. This percentage determines how much of each annuity payment is considered to be a return on your original after-tax investment. The rest will be considered your earnings or gains on your investment, and it will be subject to tax.