Social Security functions as a lifetime guaranteed annuity.
An annuity is a product issued by a financial institution designed to pay out a steady, fixed stream of payments to an individual over an extended period of time. Annuities are most commonly used as part of a retirement plan to ensure a regular basic income. Both Social Security and defined benefit pensions are examples of annuities that are guaranteed for life.
When the annuity is created, the individual either pays a lump sum up front, or agrees to a regular payment plan, often to an insurance company. During this period, money paid into the annuity is invested in the market.On a fixed date, the company begins making regular payments known as distributions back to the individual over a given period of time (such as 20 years), or until the individual or their spouse passes away. The period in which the individual is paying into the annuity is known as the accumulation phase, while the period in which payouts occur is known as the annuitization phase.
Annuities can be fixed or variable. In a fixed annuity, payouts are regular and periodic. In a variable annuity, payouts will vary based on the performance of the annuity fund in the market. This option is less stable, but also allows for more potential rewards.
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