An annuity is often referred to as a sort of contractual instrument that a person purchases with the expectation of receiving recurring payments in the future. The Social Security system, which people pay into during their working years in order to receive benefits after retirement, is a typical example of an annuity.

Annuity collections may have a fixed or variable nature. During the collecting period, a fixed annuity will produce consistent, predictable payments, but a variable annuity’s payouts will depend on the performance of the investment. The earning potential is bigger but the danger is higher with variable annuities. Although they might not always maximize the return on investment, fixed annuities are a safer alternative.

An annuity has a long timeline, thus the investment is divided into the “accumulation phase” and “annuitization phase,” respectively. The money in an annuity cannot be touched without incurring fees throughout the accumulation phase. The collection of the scheduled payments takes place during the annuitization phase.

A more broad definition of an annuity comprises any predetermined sequence of payments provided to an individual or entity.

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