Annuity
An annuity is a financial product that converts a lump sum into a stream of periodic payments, either for a fixed period or for life. Annuities are issued by insurance companies and provide longevity protection — you cannot outlive the payments. They are commonly used to guarantee retirement income.
The two primary types are immediate annuities (you pay a lump sum and payments begin immediately, often used at retirement) and deferred annuities (money grows tax-deferred and payments begin later — variable, fixed, or indexed to a market index).
Annuities address sequence-of-returns risk by guaranteeing income regardless of market performance, making them valuable for covering fixed retirement expenses. However, they come with fees (often 1–3%/year for variable annuities), surrender charges if you withdraw early (typically 7–10 years), and limited liquidity.
For most people, a simple index-fund portfolio with a 3.5–4% withdrawal rate matches or beats annuity returns after fees. Annuities make the most sense for people who lack pension income, are worried about longevity, or want to reduce the mental burden of managing investments in old age.
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- Pension (Defined Benefit Plan)
- A pension is a defined benefit (DB) retirement plan that pays a guaranteed monthly income for life, based on your years of service and salary history. The employer bears the investment risk, unlike a 401(k) where the employee does.
- Safe Withdrawal Rate (SWR)
- The safe withdrawal rate is the maximum percentage of a retirement portfolio you can withdraw annually without running out of money over a given time horizon. The 4% rule is the most widely cited guideline.
- Sequence of Returns Risk
- Sequence of returns risk is the danger that a series of poor investment returns early in retirement — combined with ongoing withdrawals — will permanently deplete a portfolio, even if long-run average returns are acceptable. It is the primary financial risk of early retirement.
- Social Security
- Social Security is a US federal program that provides retirement income, disability benefits, and survivors benefits. Benefits are funded by FICA payroll taxes. The amount you receive in retirement depends on your 35 highest earning years and the age you claim.