annuity
A financial product that pays out a fixed stream of payments to an individual, typically used as an income stream during retirement.
Example
“She purchased an annuity that would pay her $2,000 per month for the rest of her life.”
Memory Tip
ANNU-ity — annu sounds like 'annual.' You get annual (or regular) payments.
Why It Matters
Annuities solve one of the biggest retirement fears: outliving your money. By converting a lump sum into guaranteed income they shift longevity risk from you to the insurance company. For people without a pension an annuity can replicate that steady paycheck in retirement.
Common Misconception
Many people think annuities are always a bad deal because of high fees. While some annuities do carry excessive costs immediate income annuities where you trade a lump sum for guaranteed monthly income are straightforward products that can make sense for retirees who need income certainty.
In Practice
Suppose you retire at 65 with $500,000 saved. You could purchase an immediate annuity that pays $2,500 per month for life regardless of how long you live. If you live to 90 you would receive $750,000 in total well above what you paid in. The tradeoff is losing control of that capital.
Etymology
From Latin 'annuitas' from 'annus' meaning year — payments made annually.
Common Misspellings
Build your retirement portfolio with low fees
Related Terms
More in retirement
Other retirement terms you should know
See Also
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