An annuity typically refers to a type of contractual product bought into by an individual with the promise of receiving regular payments at a later date. A common example of an annuity is the Social Security system, which individuals pay into during their working years in order to collect from once retired.
A fixed or variable nature may define annuity collections. A fixed annuity will yield regular, predictable payments during the collection period while a variable annuity’s payouts will be determined by the success of the investment. Variable annuities present a higher earning potential with a greater risk. Fixed annuities are a safer bet, though do not necessarily take full advantage of the investment.
There is a long-term timeline associated with an annuity, meaning the investment is marked by “accumulation phase” and “annuitization phase,” respectively. During the accumulation phase, the funds in an annuity cannot be touched without penalty. The annuitization phase is the period during which the regularly timed payments are collected.
A more generalized annuity definition includes any set series of payments made to an individual or entity.