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Don’t know if you’re saving enough for retirement? You’re not alone: 61% of Americans over age 50 are worried their retirement funds will run out.

One strategy that can help is having different sources of retirement funds to draw on when you stop working. For example, a 401(k) plan if your employer offers it, an individual retirement account, Social Security, and an annuity.

Annuities have been around for a long time and have recently surged in popularity. Here’s how they can relieve some of your post-work retirement savings worries.

What is an annuity?

An annuity is simply a contract with a financial services company. You provide funds which are invested; the company promises to make periodic payments to you starting immediately or at a future date. The annuity type determines whether you purchase it all at once or with contributions over time.

What types of annuities are there?

There are many types of annuities, each of which can fit different investing needs. Three common types include:

• Variable annuities are invested in the market and their value goes up or down depending on market performance. You choose how the funds are invested (via investment options called sub accounts), and you may also add on features (called riders) such as death benefit protections. Some variable annuities are also designed to help you set aside a protected amount of money to create future guaranteed retirement income.
• Fixed annuities are typically tied to a set interest rate over a specific period of time (often 3, 5, or 10 years). While fixed annuities offer less potential for growth, there’s also less risk. At the end of the set time, the fixed annuity may renew at the current interest rate.
• Registered index-linked annuities, or RILAs, are a fairly new investment option but have become fast growing and popular. They enable you to choose between investment options called segments. Unlike variable annuities, segments aren’t invested directly in a market index; instead, their performance follows a formula that tracks to an index. Segments, in turn, are invested for a set period of time (typically 1, 3, and 6 years) and they can also be invested in different indexes with different risk profiles. In addition, RILAs sometimes have buffers, which can help limit some losses in a declining market.

Why would I invest in an annuity?

No two savers are alike, and that goes for people planning for retirement. However, there are some shared reasons why people choose to invest in an annuity.

• You want a guaranteed stream of income. Unlike distributions you take from a 401(k) or an IRA, once your investment funds are converted (or annuitized), the amount you receive every month from an annuity is guaranteed. (Another guaranteed source of retirement income: Social Security.) So, for people who want the security of knowing how much they may have each month in retirement, an annuity offers structure and dependability.
• You want to defer taxes on investment growth until you need the savings. Any growth in your annuity isn’t taxed until you withdraw it. For those who expect to be in a lower tax bracket in retirement, this may be an advantage.
• You want to provide death benefit features to your survivors. Many variable annuities automatically offer a death benefit feature, often with no underwriting required, that guarantees a payment to your beneficiaries after you die. Others may offer a rider that you can purchase to provide this benefit. In addition, the annuity proceeds are not subject to probate as long as the estate is not the annuity beneficiary.
• You want to try to protect against inflation. Because of their potential for growth, annuities may offer an option to guard against future price increases.
• You may want to save more than the allowable maximums in other accounts. Employer-sponsored retirement savings, such as 401(k)s, typically have IRS contribution limits. If you reach those contribution limits, you can use an annuity as an additional way to boost tax-deferred savings. And, if you invest money you’ve already paid taxes on (known as nonqualified money), there are no IRS limits on the amounts you can invest in an annuity.

How can I take my annuity payout?

You can generally take your annuity payout as a one-time lump sum or as a guaranteed monthly payment for your life or a set period of time. Your annuity may also be structured for an immediate payout—typically within a year—or to start at a later date.

Do annuities have fees, taxes, or penalties?

All investments have fees, and annuities are no different. Fees vary based on the type of annuity and the riders you purchase. As with other retirement savings types, there are typically withdrawal age limitations and early withdrawal penalties; these are sometimes referred to as surrender charges. However, your annuity may be structured to ensure a free withdrawal percentage each year, or during qualifying, penalty-free events such as a disability.

Are annuity withdrawals taxed?

Yes: You haven’t paid tax on any potential growth yet, so you are required to do so when you take money out. However, annuities may be structured to take out funds as income or withdrawals, and that can have a very different effect on your taxes. Talk to your financial professional or tax advisor for insights.

What is annuity accumulation and annuity distribution?

Annuity accumulation is the period of time when your annuity is being funded and potentially growing (before you take any funds out). Annuity distribution refers to when you begin to withdraw funds. That distribution may be over a specified period of time or over your lifetime. There are likely a variety of distributions available; consult your financial professional or tax advisor for more insights.

Do my beneficiaries continue to receive payments from the annuity after I die?

It depends on the specifics of your contract. For information about your annuity, consult your financial professional or tax advisor.

What other riders are available for annuities?

There are a range available, depending on the exact annuity you choose. Some may benefit you for leaving your money in the annuity, while some may offer some protection against losses. A financial professional can walk through the options based on your needs.