What Is an Annuity? Understanding How Annuities Work—and Who They’re Right For

When it comes to retirement planning, one of the most common questions we hear at Carter Financial is a simple one: What is an annuity, and should I have one?

Annuities are often misunderstood, sometimes oversimplified, and occasionally unfairly criticized. In reality, they are powerful financial tools that—when used appropriately—can provide stability, predictability, and peace of mind in an uncertain world. Like any financial strategy, annuities are not for everyone, but for the right person, at the right time, they can play an important role in a well-rounded financial plan.

Let’s break it down in clear, plain language.

What Is an Annuity?

At its core, an annuity is a contract between you and an insurance company designed to help you grow and/or protect your money and, in many cases, provide guaranteed income—often for life.

You fund an annuity with either:

• A lump sum, or

• A series of payments over time

  
  

In return, the insurance company agrees to provide benefits that may include:

• Tax-deferred growth

• Principal protection (depending on the type)

• A predictable income stream

• Optional guarantees that help reduce financial risk

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Annuities are most commonly used as part of retirement planning, especially by individuals who value certainty and income stability.

The Main Types of Annuities (At a High Level)

While there are several variations, most annuities fall into a few main categories:

1. Fixed Annuities

These offer a guaranteed interest rate for a specific period of time. They are often compared to CDs, but with tax-deferred growth.

• Predictable returns

• Low risk

• Simple and easy to understand

2. Fixed Indexed Annuities

These are tied to a market index (such as the S&P 500), but do not directly invest in the market.

• Potential for higher returns than fixed annuities

• Protection against market losses

• Returns are subject to caps or participation rates

3. Variable Annuities

These allow investment in market-based subaccounts.

• Higher growth potential

• Higher risk

• Often paired with income or death benefit riders

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At Carter Financial, annuity recommendations are always based on your goals, timeline, and comfort level—not on a one-size-fits-all approach.

How Do Annuities Earn Returns?

One of the most important—and misunderstood—parts of annuities is how returns work.

Annual Returns: The Basics

• Fixed annuities earn a stated, guaranteed rate.

• Indexed annuities earn returns based on the performance of an index, subject to limits.

• Variable annuities fluctuate with the market based on investment performance.

It’s important to note that annuities are not designed to “beat the market.” Instead, they are designed to manage risk, protect income, and provide stability, especially as you approach or enter retirement.

The Upsides of Annuities

Annuities offer several benefits that appeal to retirees and near-retirees:

1. Guaranteed Income

Many annuities can be structured to provide income you can’t outlive, which helps address longevity risk—the risk of living longer than your money lasts.

2. Tax-Deferred Growth

Your money grows tax-deferred until withdrawals begin, which can be especially helpful for those who have already maxed out other retirement vehicles.

3. Principal Protection

Certain annuities protect your principal from market downturns, offering peace of mind during volatile periods.

4. Customization

Annuities can be tailored with riders and options to address income needs, spousal protection, and legacy goals.

Things to Understand Before Purchasing an Annuity

While annuities can be excellent tools, transparency and education are key.

• Liquidity: Annuities are long-term products. Early withdrawals may result in surrender charges.

• Fees: Some annuities (especially variable annuities) include fees, which should be clearly explained.

• Access to Funds: Most annuities allow penalty-free withdrawals up to a certain percentage annually.

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At Carter Financial, our role is to ensure clients understand exactly how an annuity works before making a decision.

Who Are Annuities Right For?

Annuities are often well-suited for individuals who:

• Are approaching or already in retirement

• Want predictable income

• Are concerned about market volatility

• Value guarantees and stability

• Want to supplement Social Security or pension income

• Prefer a portion of their assets to be protected rather than fully exposed to the market

They can be especially beneficial for those transitioning through major life changes—such as retirement, widowhood, or divorce—when financial certainty becomes even more important.

How Annuities Fit Into a Bigger Financial Picture

Annuities are not meant to replace all other investments. Instead, they work best as one component of a diversified financial strategy. Think of them as the foundation—the part of your plan designed to provide reliability—while other investments focus on growth.

At Carter Financial, annuities are used intentionally and strategically, never as a default solution.

Final Thoughts: Education Comes First

Annuities are neither “good” nor “bad”—they are tools. When properly selected and thoughtfully implemented, they can offer confidence, income security, and peace of mind during retirement.

At Carter Financial, we believe informed decisions lead to better outcomes. Our role is to help you understand how annuities work, whether they fit your goals, and how they may complement your overall financial plan.

If you value clarity, stability, and a strategy built around your life—not just your money—annuities may be worth exploring.