Retirement Read Time: 3 min

How does an annuity work?

As a retirement income planning tool, annuities are the subject of much discussion these days. As a means of generating retirement income, they can be very useful. Yet annuities come in many shapes and sizes and are not a “one size fits all” financial instrument.

Annuities can be fixed or variable, and either of those can be deferred or immediate. With a fixed annuity, the insurance company guarantees a set interest rate of return on your premium for a specific amount of time. A variable annuity comes with investment options in which to invest your premium for financial market growth potential. Payments under an immediate annuity can begin either right after you purchase the annuity or may be postponed up until 12 months later. Payments under a deferred income annuity are delayed and can begin at some future time you select.

It’s no wonder that many people are left scratching their heads when contemplating annuities.

So just what is an annuity?

Let’s start at the beginning. Put simply, an annuity is a contract between an individual and an insurance company. The individual gives the company a sum of money (the premium), and in return is promised a periodic payout for a stated length of time or their lifetime. Some annuities enable you to invest in the market, while others do not. There is no legal limit to the amount you can contribute to an annuity, but contributions are not tax deductible. Taxes on any earnings are deferred until you make withdrawals and at that time you will pay ordinary income taxes on gains. There is a 10% penalty if you withdraw earnings before age 59 ½.

Consider your purpose for buying an annuity

What has drawn your attention to annuities? Did your neighbor or co-worker just purchase one? Did your financial professional talk to you about them? At best an annuity should complement the other holdings in your retirement strategy, but the bottom line remains – annuities can provide guaranteed income for your future.

Consider your time horizon and life expectancy

Annuities are designed to be long-term retirement financial strategy tools and can be a means of transferring the risk of outliving your retirement nest egg. Deferred annuities allow you to delay taking income until sometime in the future but consider carefully if you might need those funds before the age of 59 ½. If you are on the edge or already in retirement, an immediate annuity can begin paying income shortly after purchase. Keep in mind the average life expectancy in the US is 77½.1

Consider your total retirement savings

Whether or not you were a supersaver during your working years, consider the percentage of your overall retirement savings you might put into an annuity. A retirement strategy should contain a cash reserve to cover emergencies or other contingencies. Since annuities typically impose a surrender charge on any withdrawals made in the years following a premium payment (typically seven years or less) and have limited liquidity, especially once a contract is annuitized, it may be appropriate to only put a portion of your retirement savings into an annuity.

Consider your overall long-term retirement financial strategy

Most workers already have one source of guaranteed income in the form of Social Security. Some may feel confident they can efficiently invest their savings to supplement Social Security while others may prefer another source of guaranteed income to feel financially confident. For those who find watching the effects of the ups and downs of the investment markets on their retirement savings a little unnerving, annuities can offer benefit guarantees that other financial instruments cannot.

Consider the type of annuity

Before making any decision, do your homework. Consider carefully what your current circumstances are and what you plan or anticipate for the future. Be sure to consult with your financial professional or, your legal or tax professional before making any purchase.




Variable annuities are long-term investment vehicles that involve certain risks, including possible loss of the principal amount invested. The investment return and principal value may fluctuate so that the investment, when redeemed, may be worth more or less than the original cost. Withdrawals of taxable amounts will be subject to ordinary income tax and possible mandatory federal income tax withholding. If taken prior to age 59½, a 10% IRS penalty may also apply. Withdrawals affect the variable annuity’s death benefit, cash surrender value and any living benefit and may also be subject to a contingent deferred sales charge.

Variable annuities and their underlying variable investment options are sold by prospectus only. Prospectuses contain important information, including fees and expenses. Please read the prospectus carefully before investing or sending money. You should consider the investment objectives, risks, fees and charges of the investment company carefully before investing. Please contact your investment professional or call 800.221.3253 for a prospectus, which contains this and other important information. To download a contract or fund prospectus, please click here.2

Annuity guarantees are backed exclusively by the strength and claims-paying ability of The Guardian Insurance & Annuity Company, Inc. (GIAC) and are issued by The Guardian Insurance & Annuity Company, Inc. (GIAC), a Delaware corporation. Individual variable annuities are distributed by Park Avenue Securities LLC (PAS). GIAC is a wholly owned subsidiary of The Guardian Life Insurance Company of America (Guardian). PAS is a wholly owned subsidiary of GIAC. Guardian, GIAC, and PAS are located at 10 Hudson Yards NY, NY 10001.  Contract provisions and investment options vary by state. PAS is a member FINRASIPC

All investments contain risk and may lose value. Diversification does not guarantee profit or protect against market loss.

Guardian and its affiliates, subsidiaries, employees, agents, and outside contributors, are not authorized to provide legal, tax, or investment advice in the materials of this website including but not limited to any blogs. The information provided does not constitute a solicitation of an offer to buy or an offer to sell financial or insurance products. Individual situations can vary; please contact a financial professional, your tax, investment or legal advisor for guidance and information specific to your situation. Guardian is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by this material. To learn more about Guardian, visit

Brought to you by The Guardian Network © 2024. The Guardian Life Insurance Company of America®, New York, NY

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