You have dreams for your retirement. Maybe you want to moor a houseboat in the sandstone canyons of Lake Powell. Maybe you want to volunteer as a construction worker with Habitat for Humanity or golf every evening in Naples, Florida. Whatever your retirement dream is, an annuity is a financial tool you can use to subsidize those dreams.

What Is an Annuity?
An annuity is a contract between you, the annuitant, and your insurance company. During your working years, you feed the annuity either through a single lump-sum payment or periodic contributions. When you retire at age 59.5 or later, the insurance company will provide periodic disbursements during your Golden Years. The disbursement period often lasts 25 years, or until you and/or your spouse, um, shuffle off this mortal coil. Most annuity contracts come with a death benefit as well.

Annuity Perks and Conditions
Annuities are deferred tax shelters. Your initial contributions don't reduce your taxable earnings, but your earnings grow tax-free until withdrawal. If you withdraw funds too early, you'll pay steep surrender charges. However, many accounts allow you to draw 10-15 percent of the account balance without demanding their pound of flesh.
Annuities come in two basic flavors: fixed and variable. Which is best for your retirement?

How Fixed Annuities Work
Most soon-to-be retirees choose fixed annuities, which provide a steady stream of income thanks to the insurance company's guaranteed interest rate, called the minimum credited insurance rate. During the accumulation phase, while you work, the company invests your principal in a fixed-income portfolio. During the disbursement period, after you retire, the annuity generates earnings from its assets. Those earnings are usually on par with a long-term Certificate of Deposit.

Fixed annuities are great for retirees who want to take advantage of lower tax brackets during retirement, those averse to financial risk, and those who expect to live past 80.

How Variable Annuities Work
Variable annuities offer the potential for higher rewards. The insurance company invests your payments in variable assets like public stocks and money market instruments. The investment portfolio, which you can select, is called a subaccount. You are usually guaranteed a small, minimal baseline income regardless of market performance. If the portfolio does well, a specialist from says you can receive larger payments.

Variable annuities are great for retirees who want to match their increased cost of living, who enjoy the "picking game," and those who want to maximize their contributions for their spouse's retirement.

An annuity protects more than your investments. It protects your spouse, your lifestyle, and your dreams. And don't those things deserve to be subsidized?

Author's Bio: 

Hannah Whittenly is a freelance writer and mother of two from Sacramento, CA. She graduated from the University of California-Sacramento with a degree in Journalism. She interviews with small businesses and educational institutions regularly to learn new career building strategies.