An annuity can be a way to add some certainty to your retirement planning, both when you’re saving for retirement and when you’re looking to generate income in retirement. But many people misunderstand how annuities work, leading to a lot of common annuity myths and natural questions.

One frequent question is: “Can you lose your money in an annuity?” While there are a few scenarios where that may be a possibility, for the most part, the benefit of an annuity is the guarantees it offers to safeguard your nest egg. Here’s what you need to know.


An annuity is a financial product that can help you save for retirement or provide a regular, guaranteed income, typically in your golden years. An annuity works with other parts of your financial plan, such as investments or cash value life insurance, to strengthen your overall retirement strategy.

Annuities that help you save for your retirement are known as accumulation annuities, while income annuities are structured to deliver regular payments to you during your retirement.


Accumulation annuities are typically purchased by people who are many years from retirement. You can put a lump sum into an accumulation annuity or make payments over time. Eventually, you can convert the value of your accumulation annuity into an income annuity to generate a regular stream of lifetime income. Alternatively, you can eventually withdraw the money and use it for something else. There are two types in this category:

  • Fixed annuities grow at a guaranteed rate, meaning that you’ll know exactly how much money you’ll have at the end of the accumulation annuity’s term.
  • Variable annuities, as the name indicates, grow at a variable rate because they have some exposure to the markets. Because the markets have ups and downs, a variable annuity is the one instance where you could lose some of your money in an annuity if the market were to fall.

Because annuities are considered retirement vehicles, they grow tax-deferred. This means you won’t owe taxes until you begin to make withdrawals. But if you withdraw too early, you could face a tax penalty, as well as early surrender fees.


Income annuities, which generate a regular, guaranteed income in retirement, work a little differently:

  • An immediate income annuity will start generating a guaranteed income for the rest of your life soon after you have paid a lump sum payment to the insurance company. This is often a popular option with people who are close to retiring — or those who already have.
  • A deferred income annuity will also generate a regular, guaranteed income, but not until a predetermined waiting period has passed. During this time, the money you have paid in has a chance to grow a bit more, which could help increase your future payouts.


While annuities provide guaranteed retirement income, it’s not uncommon to worry that your heirs could end up empty-handed if you die prematurely. While this could happen with certain income annuities, there are a number of options and features you can add to an income annuity to ensure that some or all of the money that you put into an annuity is paid out to you and your loved ones.

1. Life with refund: This option ensures you or your beneficiary will get at least the amount you paid in to your immediate income annuity. It pays out income for as long as you live, but if you die before the amount you paid in has been paid out, your beneficiary will continue to receive the regular payments, up to the initial amount paid.

2. Life with period certain: This option, which can be added to some income annuities, guarantees your regular income payments for a predetermined period of time or as long as you live, whichever is longer. If you pass away prior to the end of the predetermined time, your heirs will continue to receive the payments for the remaining period.

3. Period certain only: You could also structure your income annuity with this option. In this case, the payout is only guaranteed for a certain number of years to you or your heirs. If you live longer than the specified period, your payments will stop.

Some annuities have death benefit guarantees built into their policies. For example, if you purchased a deferred income annuity and die during the deferral or waiting period, your beneficiaries can usually get the full value of the policy.

Similarly, many accumulation annuities (which help you save for retirement) offer a death benefit guarantee. So, if you pass away before having converted the annuity to an income stream, this ensures that your beneficiary will receive the higher amount of your current contract value or the full amount you paid in (minus any withdrawals).

Fixed-rate accumulation annuities have a guaranteed growth rate — but variable accumulation annuities do carry some risk because they have exposure to markets and could fluctuate in value.

The best way to learn more about how annuities can supplement and strengthen your retirement plan is to connect with a financial advisor. Be sure to do your research as well to make sure the insurance company you are working with will meet its contractual obligations to you and your heirs.

Annuities are contracts sold by life insurance companies and are considered long-term investments that may be suitable for retirement. Income annuities (either immediate or deferred) have no cash value and once issued they can’t be terminated (surrendered). The original premium paid is not refundable and cannot be withdrawn.

Withdrawals are pursuant to possible contract limitations/adjustments and IRS tax rules.

All guarantees associated with annuities and income plans are backed solely by the claims-paying ability of the issuer.

All investments carry some level of risk, including potential loss of principal. Withdrawals from variable annuities may be subject to ordinary income tax, a 10% IRS penalty if taken before age 59 ½, and contractual withdrawal charges.

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