Retirement is meant to be your golden years—that time in life when work is a memory and your time is yours to spend doing whatever you want.

For many people, however, retirement can be scary, particularly in terms of money. There are many retirement planning calculators to get you started figuring out how much money you’ll need for your personal retirement dreams.

The numbers can be staggering. Therefore — beyond the usual suspects of IRAs, Social Security, pension plans, and part-time jobs — what can you use to ensure a monthly income in your retirement years? Consider an annuity.

What is an annuity?

An annuity is a contract between you and an insurance company that covers specific goals, such as lifetime income, long-term care costs, or principal protection. The premium-paying period (where you pay the insurance company) is called the accumulation phase.

When that period is over, the annuity (your insurance company) starts paying you. This is called the payout phase.

Fixed annuities

Fixed annuities are intended to last for the entirety of your retirement. This is because they are designed to protect against outliving your income.

The annuitant, you, gives a lump sum (usually at least $5,000 or $10,000) to an insurance company in exchange for guaranteed monthly payments. A fixed annuity contract allows for the accumulation of capital on a tax-deferred basis.

The only way you might owe more on your fixed annuity would be if you end your contract early or add a rider, such as for long-term care. You can read more about annuity riders here or here. Often, fixed annuities embed their costs in the interest rate or in the income payment amount.

There are two types of fixed annuities: Traditional, where the interest rate is guaranteed for one year at a time, and fixed indexed, in which the annual growth is benchmarked to a stock market index.

Variable annuities

A variable annuity is a tax-deferred retirement vehicle. With a variable annuity, however, you invest your funds indirectly in financial markets.

A variable annuity pays out a level of income determined by the performance of the investments you choose. This vehicle may give you more gain than a fixed annuity, but unlike a fixed annuity, there is no guarantee of the amount of each payment.

You do have access to the money you pay in with a variable annuity. Once you start receiving monthly payments from a variable annuity, it is guaranteed for the rest of your life.

Generally, a variable annuity’s fees are explicit while the fees for a fixed annuity are folded into the interest rates or income payouts.

Where to buy annuities

Since annuities are not insured by the Federal Deposit Insurance Company (FDIC), you (or your financial advisor) need to research the financial strength of various insurance companies before making any selection.

The National Association of Insurance Commissioners can offer you some guidance. Furthermore, because of the variance among different annuities in the market, it is worth speaking to a financial advisor about what kind of annuity is best for you.

To find out more about your personal annuity literacy, take this great Kiplinger quiz!

The bottom line

As famous radio speaker and author Earl Nightingale once said, “As in all successful ventures, the foundation of a good retirement is planning.” Annuities can be a great way to supplement your monthly income during your golden years.

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