So what exactly is an annuity?
Retire and the paycheck stops. This is a contract that creates a replacement — money that arrives every month.
The frightening part of retirement is not usually running short. It is that the money stops arriving. You had a payday for thirty years, and then one month there isn’t one. Even with savings in the bank, a question shows up every month: how much am I allowed to take out?
An annuity is a contract that removes that question. You give an insurance company a lump sum, and in exchange it agrees to pay you a set amount every month. In plain terms, you are creating a paycheck.
How is that different from Social Security?
In shape, it isn’t. Both arrive monthly and both last for life. The difference is that Social Security pays what it pays — you cannot enlarge it, and for most people it does not cover the whole budget. An annuity is how you build the missing part yourself.
Start collecting now, or later?
This is the fork, and it is not complicated.
- Start now — you deposit a lump sum and payments usually begin the following month. This fits someone already retired, or nearly there
- Start later — you fund it now and collect from an age you pick. This fits someone still working with years to go
What to understand before you commit
Money placed in an annuity is tied up for a while — commonly five to ten years. Take it out early and the company keeps a fee. That is precisely why this cannot be money you might need soon.
Keep six months of living expenses outside the contract, somewhere you can reach in a day. No exceptions. The situation to avoid is paying a penalty to break an annuity because of a hospital bill or a sudden job loss.
How much should go in?
There is no set answer, but there is a starting point: the gap from the first article — what you will need each month, minus Social Security and any workplace plan. Translating that monthly figure into a deposit depends on your age and when you start, so bring the number and we can work it out together.