Finance Dictionary
Annuity
Definition
A financial product that pays out a fixed stream of payments to an individual, typically used as an income stream for retirees.
Deep Dive
An annuity is a financial product, typically offered by insurance companies, designed to provide a regular stream of income payments to an individual, often used for retirement planning. In exchange for a lump-sum payment or a series of payments (premiums), the annuitant receives periodic disbursements for a specified period or for the rest of their life. Annuities can be structured as immediate annuities, where payments begin soon after purchase, or deferred annuities, where payments start at a future date, allowing the initial investment to grow tax-deferred.
Examples & Use Cases
- 1A 65-year-old retiree uses a portion of their savings to purchase an immediate annuity, which then pays them a guaranteed $2,500 per month for the rest of their life.
- 2An individual contributes regularly to a deferred variable annuity during their working years, aiming to grow their principal through market investments before converting it into an income stream upon retirement at age 60.
Related Terms
Retirement PlanningPensionLongevity RiskInvestmentInsurance