So, an annuity is an interesting contract. It is a contract between an insured and the insurance company.
But the wonderful thing about an annuity, you fund it with your own dollars, so you’re going to put money into it. The money that you put into it grows tax deferred. So, any interest that you earn that’s getting applied to your policy is earned tax deferred so you don’t have to pay taxes on it until you use it.
And at some point in time, in the future — generally speaking, after the age of 59 and a half — you can start taking money out of the annuity systematically. And what I mean by that is you can set it up to pay for the rest of your life. Pay for 10 years, for 15 years, you can. One of the options is to pay for your lifetime, and then when you pass away, it continues to pay someone else for their lifetime.
But the huge advantage of an annuity is it allows you to save your money, income tax deferred and take it back out systematically like a paycheck.
For more answers to common retirement planning questions, check out the rest of the Question Mark: Retirement Planning series.