Annuity

An annuity takes a lump sum or long-term contributions and pays a fixed amount each month for a set period. It exists to cover the years after retirement when income stops.

Its greatest value is insuring against living too long. Drawing down a lump sum yourself brings constant anxiety about when it will run out; a lifetime annuity keeps paying as long as you live.

The main types are fixed-term and lifetime. A twenty-year term pays more each month, while a lifetime annuity pays less monthly but never stops.

The drawback is illiquidity. Once started it is hard to convert back into a lump sum, and surrendering early is costly. It cannot respond to a sudden need for a large amount.

So committing everything to an annuity is not advised. The common design covers the minimum you genuinely need to live on with an annuity and keeps the rest invested flexibly.