Annuities are investments that provide guaranteed level-income payments for a set period of time. The income level depends on how much money you put into your annuity. The time can be set for 10 or 20 years, or guaranteed for life, depending on your needs. Only insurance companies are allowed to offer annuities. Although they have fallen out of favour over the last decade or two (due to lower interest rates), it is important to understand what annuities are and how they might work for a portion of your retirement income. Some people find annuities add peace of mind for their retirement plans.

Term Certain Annuity or Annuity Certain

This is a guaranteed income payment for a specific period of time, usually 5 to 25 years. You give an insurance company a lump sum of your money, and they return it to you with interest in monthly, quarterly, or annual payments, until the guarantee period is over. These are particularly useful when you have a specific expense you wish to cover, for a set period of time. (Think of getting 7 year financing on a car at 0%. If you have the full amount to pay in cash, you might consider a 7 year Term Certain Annuity. You then know you will have the monthly cash flow to make the payments. You will also earn a little bit of interest on the annuity.)

If you pass away during the term of this annuity, your beneficiary or estate is entitled to all of the payments that have not yet been made.

Single Life/Joint and Survivor Annuity

This annuity is guaranteed to provide income for the remainder of your life (or you and your spouse in the case of a Joint and Survivor Annuity). The biggest objections that most people have with this option are that the funds are locked in with the insurance company and you might not get much of your principal back if you die shortly after buying the annuity. This was once the case, but there are increasingly more options available to help defray these possible risks and ensure that you are far more likely to get the full value from the funds you place in a life annuity.

A joint and survivor annuity is a great way to help you receive full value, as one spouse often outlives the other by a fair number of years. You can also have payments that are guaranteed for 5 to 20 years, so if you do die early you can guarantee a minimum amount will be paid out to your beneficiaries or your estate.

There are plenty of options available, but you should never consider putting all of your money into an annuity, unless you have some very specific needs that can only be solved by using this investment option.