There are different types of annuities, but all boil down to essentially the same thing: An insurance contract that offers guaranteed income, often for life, and sometimes a shot at capital appreciation. Although annuities are meant to supplement income from a traditional stock and bond portfolio; it is seldom a good idea to invest more than half of your portfolio in an annuity/annuities because an annuity is fundamentally illiquid.
Annuities are commonly utilized for pre-retirees and retirees who want to minimize worry about bear markets in retirement. Retirees who are risk averse know they will have a guaranteed stream of income regardless of how markets perform.
Americans currently own over a quarter trillion dollars worth of annuities. There are many annuities on the market, typically offering generous payments in comparison to other investments, such as bonds. Some have higher fees, such as variable annuities, and their payments in a low interest rate market that we have now are not as attractive as they once were. Demand for annuities are likely to increase in the future as interest rates are expected to rise.
Fixed annuities, variable annuities, fixed-indexed annuities, immediate annuities and deferred annuities make up the 5 basic types of annuities. Which is best for you depends on your risk tolerance, income goals, and when you want to begin receiving annuity income.
For your particular situation, each type of annuity has advantages and disadvantages. An immediate annuity will pay the highest rate but requires giving up control of the asset. A variable annuity may increase your principal over time, but with sub-accounts, the fees are particularly high.