A fixed annuity provides a set, contracted return on the initial payment by investing the money in low-risk securities such as government bonds.The actual rate the payment earns may vary over time but the return on the payment is specified in the annuity contract. Once the periodic payments begin, they do not change, even to account for inflation.

A fixed annuity generally provides two basic options for payment: immediate or deferred. An annuity with an immediate payout begins payments to the investor beginning right after the purchase, while a deferred payout provides payments at a later date(s).

With an immediate annuity, the investor pays for the entire annuity with a single payment. The annuity begins making regular, scheduled payments right away. The most common use for an immediate annuity is to provide a guaranteed income for a retiree that is not susceptible to market risk. The investor simply takes all of the money saved for retirement and invests it in the annuity all at once.

The deferred payment annuity is a combination of retirement savings and retirement payment plan where the investor makes regular contributions to the annuity until a certain date and then receives regular payments from the annuity until death. Sometimes there is a life insurance component added so that if the investor dies before annuity payments begin, a beneficiary gets either a lump sum or the scheduled annuity payments.

An investor can also annuitize, which schedules payments until death. After that time, the payments end. It doesn't matter if the payments are made for 1 month or 40 years, they stay the same and stop at the investor's death. In exchange for giving a huge sum of money to an insurance company, the insurer promises to pay a certain amount for a specified time, perhaps as long as you live.

A difficulty with annuitization is that an investor an lose the entire principal paid. Upon death, zero remains for heirs. If you want to take cash out for any reason, you can't. It isn't the investors anymore.Another problem is that the amount paid in interest on the initial payment is small. This small payoff from annuitizing is the reason that most people don not use them. It's relatively easy to see how an insurer's payoff compares with investing money into a ladder of U.S. Treasuries, or even tax-free municipal bonds. For a fixed payout investment, it may be better to invest money in US Treasury bills, collect the recurring interest, and also have the ability to retain the principal.

Annuities are often used as tax-deferred investments, and they are usually used as an easy, conservative way to convert a lump sum, such as a 401k or IRA, into a steady, predictable income stream.

Fixed annuities can have surrender policies that prevent an investor from withdrawing money for a period of 5, 10, or more years. Some annuities allow the investor to withdraw some funds annually, for example the annual interest and up to 10% of the principal. An annuity may also have various hardship clauses that allow withdrawal with no surrender penalties in certain cases.

Annuities can work well for retirees. A fixed annuity is similar to a life insurance policy, in reverse. An annuity provides protection against the risk that the investor outlives their savings.

The majority of investors saving and planning for the long-haul do not really need annuity's return guarantees. These guarantees protect against market downturns, but if the investor is truly focused on the long-term, history dictates that the market will remain positive over the long-term.

For more information on annuities, visit Vanguard, Fidelity, or T. Rowe Price. These mutual fund companies also sell annuities and generally have better annuity products than the annuities offered by insurance companies.