What Everyone Should Know About Annuities

Whether you're admittedly clueless or think you know it all, our quiz will make you smarter about these investments.

Most people can recite at least some basic facts about mutual funds or IRAs. But annuities often leave even savvy savers bewildered.

An annuity can generate a steady source of income in retirement, so don’t let the mystery of this investment take it off the table for you and your family. Take our quiz (don’t worry, you won’t fail) to test and grow your annuity acumen:

Long live retirees

What is an annuity and how does it work?

Simply put, an annuity is a contract between an individual and an insurance company. You, as the individual, give a sum of money to the insurance company, and the insurer then promises to pay you a stream of income as long as you live, a process known as "annuitization." This feature makes annuities popular for retirement, when you likely have built up a nest egg you need to turn into a source of income to replace your paychecks.

How is an annuity different from a mutual fund or exchange-traded fund?

Mutual funds and ETFs are pure investment products, and though some pay dividends, they don't have a means to provide guaranteed income as an annuity does, according to David Rivero, Managing Director for Lifetime Income Solutions at TIAA.

Are there different types of annuities?

The two broad types of annuities are fixed and variable. As the name implies, fixed annuities generate steady returns by investing in income-producing assets such as bonds or even farmland to provide a "fixed" regular income in retirement. Variable annuities invest in equities, real estate and other investments that fluctuate in value to generate income that should grow over time to help keep up with inflation.

How do you put money into an annuity?

You can choose to save money regularly into an annuity account during your working years, then annuitize those funds when you retire to serve as income. Alternatively, you can take savings at retirement and annuitize that money into an immediate annuity. Note that your payout from an immediate annuity for the same amount of money will likely be less than a deferred annuity.

Are there fees?

There is a broad spectrum of annuities in the market. But choose carefully, because unfortunately some carry high fees or incur charges if you need to withdraw money before an agreed-upon time, says Rivero. TIAA provides its annuities at-cost to clients, helping to keep fees down for participants.

I’m retiring soon and looking to withdraw money from my retirement accounts. Why should I annuitize my savings instead of just withdrawing money from my accounts?

Just as you diversify your investments when you are saving for retirement, diversifying your income streams in retirement also is important. Add up how much money you'll need each year to cover fixed expenses like food and housing. Determine how much of those fixed costs will be covered by Social Security benefits and any pensions you may have. If there is a gap, consider an annuity to help bridge the difference. Don't annuitize all of your savings, though; you'll want to preserve some liquidity to deal with large expenses (like home repairs). You also can annuitize chunks of your money over time in retirement.

What are the advantages of annuities now?

In the past several decades, many companies and governments have stopped providing pensions to employees. That means many of us are on our own for generating retirement income. Annuities provide a unique benefit that you can't get from other products—lifetime income. Knowing you can't outlive your retirement savings is reassuring given that many people spend 20 or 30 years or more in retirement.

TIAA participants can invest in variable or fixed annuities through their employer-sponsored retirement plan. You can also invest in the TIAA Traditional Annuity through a TIAA IRA, which can allow you to boost how much you're saving for retirement.

A TIAA consultant can help you determine whether an annuity is right for you, and how it fits into your overall retirement plan.

See how much income an annuity can provide

TIAA's Lifetime Income CalculatorOpens in a new window can also show you how much to put into an annuity to get a target retirement income.

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This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor's own objectives and circumstances.

TIAA Traditional is a fixed annuity product issued through these contracts by Teachers Insurance and Annuity Association of America (TIAA), 730 Third Avenue, New York, NY, 10017: Form series including but not limited to: 1000.24; G-1000.4; IGRS-01-84-ACC; IGRSP-01-84-ACC; 6008.8. Not all contracts are available in all states or currently issued.

Annuities issued by Teachers Insurance and Annuity Association of America (TIAA), New York, NY. Annuity contracts may contain terms for keeping them in force. Your financial consultant can provide you with costs and complete details.