When individuals plan their retirement, they are facing many important decisions. Where and how they are going to live, what sort of income will they have? In addition, most importantly, how will they arrange that income for when they no longer work?

Choosing an annuity is one of many investment retirement income options that are out there. An annuity is an agreement between an insurance company and an individual that involves the person making payments to the insurer which will be invested and earn money to be paid back to the individual in periodic payments as supplemental income for the individuals retirement.

The purpose of an annuity and supplemental income is to cover the items and expenses from day to day living to medical costs that social security and Medicare don’t cover. The amount of supplemental income you plan for your retirement has a direct bearing on the quality of life you lead after you stop working.

An annuity contract is the actual written agreement between the individual and the insurance company. This contract contains all the terms of the annuity including the structure, fees, penalties, payment, beneficiaries, and payout structure. No matter what the prospectus from the insurance company said, it is the contract that you need to read word for word, and compare to the prospectus, so that you know you have purchased the exact annuity and the benefits that you wanted.

By signing this contract and purchasing an annuity your investment now falls under a 403(b) plan. Which is essentially a tax-deferred investment, you do not have to pay taxes on the annuity until you withdraw money from it. When your periodic payouts are made, you will be taxed on these as income, instead of as a capital gain.

The contract for an annuity is beneficial to the individual because it legally binds the insurance company to payout to the individual a guaranteed periodic payment once the individual reaches retirement age and requests the payments to begin. This contract is a guarantee that you will receive risk free retirement supplemental income. Essentially money in the bank, because you will receive the payments no matter what happens, even death is not a worry because your annuity contract can be set up to pay out to your spouse or other beneficiary if you die before the end of the annuity term.

This is why many people choose an annuity as their main source of retirement supplemental income, because it is risk free, and they are guaranteed a certain amount of money within a certain time frame. In this day and age when social security is looking as if it may become an institution of the past, and Medicare is picking and choosing what health care costs it will cover, supplemental income is a must for any retiree.

You should review the complete plan, considering such factors as the guaranteed interest rate, the surrender charges, and the administrative and maintenance fees. A high interest rate during the first year is not always the better choice. This is especially true if the interest rates drop to a low minimum rate the next year with high surrender charges and additional fees.