An annuity is a trade: you give an insurance company a lump sum, and it pays you guaranteed income, either starting now or after your money grows for a stretch of years. At 5.5%, $500,000 buys about $3,439 a month for 20 years. The catch lives in the fees and the fine print, so here's the whole picture.
You sign a contract with an insurer and hand over money, one lump sum or contributions over time. From that moment the insurer owes you a defined stream of payments. It invests your premium, mostly in bonds, and prices your payout on three things: the amount, current interest rates, and (for lifetime annuities) how long its actuarial tables expect you to live.
That last part is what makes annuities different from an ordinary investment. A lifetime annuity is longevity insurance. People who die early subsidize people who live to 100, so an insurer can promise lifetime income at rates you couldn't safely withdraw yourself. You're not beating the market. You're pooling risk with thousands of strangers.
Annuities sort along two axes. Timing: immediate starts paying within a year, deferred grows first. Return: fixed credits a guaranteed rate, variable ties your balance to funds you pick, and indexed tracks a market index with caps and floors. Fixed immediate and fixed deferred cover most real shopping trips.
For a fixed-period payout, it's pure math. The insurer pays your principal back with interest, spread evenly over the term. Here's what that looks like at 5.5% over 20 years, straight from the payout formula:
| Principal | Monthly Income | Annual Income | Total Received |
|---|---|---|---|
| $100,000 | $687.89 | $8,255 | $165,093 |
| $250,000 | $1,719.72 | $20,637 | $412,732 |
| $500,000 | $3,439.44 | $41,273 | $825,465 |
| $750,000 | $5,159.15 | $61,910 | $1,238,197 |
| $1,000,000 | $6,878.87 | $82,546 | $1,650,930 |
Notice the shape of the deal. The $500,000 buyer collects $825,465 over 20 years, so $325,465 of the total is interest. Payments scale linearly, so every $100,000 buys about $688 a month on these terms.
Lifetime annuities price differently because age drives everything. At mid-2025 quote levels, $100,000 buys a 65-year-old man roughly $610 to $655 a month for life, and a 75-year-old $790 to $860. Women get a bit less at every age because they live longer. The annuity calculator has the full age table plus a payout mode for your own numbers.
Buy immediate when you need income now. The classic case: someone at retirement converts part of a nest egg into a paycheck for the fixed bills, housing, food, insurance. Pair it with Social Security and the essentials are covered no matter what markets do, the foundation a retirement plan wants.
Buy deferred when income day is years away and you want growth locked in first. Deferral works two levers at once. Your balance compounds, and if it's a lifetime annuity, you'll also be older when payments start, so each dollar buys more monthly income. Start with $100,000 at 50, add $500 a month at 5.5%, and by 65 you'd have about $367,131, which converts to roughly $2,525 a month over a 20-year payout. The compound interest calculator shows that engine in isolation if you want to experiment.
There's a middle path too. Multi-year guaranteed annuities (MYGAs) work like CDs from an insurer, paying a locked rate for 3 to 10 years with tax deferral, and mid-2025 rates around 5% to 5.5% made them genuinely competitive with bonds.
This is where annuities earn their bad reputation, and it's mostly deserved for the complicated ones. Watch for:
A plain fixed immediate annuity or MYGA from a highly rated insurer avoids most of this list. The fee problems concentrate in variable and indexed products with riders bolted on.
Enter a principal, rate, and payout period to see monthly income, total payments, and interest earned. Or flip to Grow mode and project a deferred annuity first.
Annuity Calculator →Plenty of people. If Social Security plus a pension already covers your essential expenses, you own longevity insurance and probably don't need more. If your savings are modest, locking them behind surrender charges removes the flexibility an emergency will eventually demand. If you're young and decades from retirement, low-cost index funds in a 401(k) or IRA almost always beat an annuity's insurance costs.
Skip them too if you can't explain the product back to the person selling it. Indexed annuities with participation rates, caps, and spread fees routinely confuse the people who buy them. The stronger the steak-dinner sales pressure, the more skeptical you should be.
The honest summary: annuities solve one problem brilliantly, the risk of outliving your money, and they solve it at a price. Decide whether that problem is actually yours, then buy the simplest contract that fixes it.
In a fixed annuity, not from market moves: the rate is guaranteed by the insurer. You can still lose through surrender charges if you pull money out early, through inflation eating a fixed payment, or in the rare case an insurer fails, though state guaranty associations typically cover at least $250,000 per person per insurer. Variable annuities can absolutely lose money, since the balance rides the market.
About $2,064 a month over a fixed 20-year period at 5.5%, which works out to $495,279 in total payments. As a lifetime annuity bought at 65, mid-2025 quotes put it roughly between $1,830 and $1,965 a month for a man. Run your own numbers with the annuity calculator, since rate and term move the result a lot.
No. FDIC insurance covers bank deposits, and an annuity is an insurance contract, not a deposit. Your protection comes from the insurer's financial strength plus your state's guaranty association, which typically covers at least $250,000 of annuity value per person per insurer. Checking an insurer's AM Best rating before buying matters more than most people realize.
Mid-2025 multi-year guaranteed annuities (MYGAs) pay roughly 5% to 5.5% on 5-year terms from well-rated insurers. Don't confuse that with a payout rate: a 7.5% payout rate on an immediate annuity at 65 includes return of your own principal, so it isn't comparable to an interest rate on savings.