For most of us, our 401(k) plan in conjunction with some savvy savings is what we are depending on to fund our golden years.  A few lucky individuals also have a traditional pension, but fewer and fewer people will have this benefit to rely on.  So, how do you go about replacing the steady income a pension used to provide? The answer may lie in annuities.

An annuity is designed to provide you with a monthly income each and every month until you die. It’s an agreement between you and the policy issuer that provides a set monthly payment for a predefined time period if you pay the issuer in advance for this service.   Annuities were designed as a safety net to ensure that you do not outlive your money.

Fixed annuities are generally considered a conservative investment, meaning they carry little risk.  This makes them particularly attractive to retirees.  Here are several traits that make annuities an attractive retirement savings vehicle:

• Annuities grow on a tax-deferred basis without having to be placed into a qualified retirement plan.
• There are no limits on the amount of money that can be contributed (unless the annuity is held in a qualified retirement plan).
• The early withdrawal penalty is set up on a sliding scale that ultimately disappears after five to ten years.
• Annuities don’t have to be probated.  This means that after you die, the balance of your annuity contract can be passed to your heirs without having to go through probate court.
• Annuity contracts are largely exempt from creditors, though each state has different rules on this.

The concept is pretty straightforward: You pay the insurer either a lump sum or several installments prior to your retirement.  When you retire, the insurer pays you back in regular, predetermined installments until you die, regardless of whether the amount distributed is greater than, equal to, or less than the amount you paid in.  Here is a breakdown of some of the different payout structures you can choose from:

• Straight life. In this scenario, you will receive a regular installment payment until you die, regardless of whether or not this amount exceeds what you paid in. However, your heirs will not be eligible to collect the balance of the contract, regardless of how much remains.  The insurance company will keep the balance, even if only one payment was made to you before your death.
• Life with period certain. This is the same design as straight life with the exception that if you pass away before the balance of your contract has been exhausted, your heirs will be able to collect a portion of the balance, either as a lump sum or via payments.
• Joint life.  For married couples, this type of annuity will continue to pay as long as at least one of the beneficiaries is still alive.
• Joint life with period certain.  This annuity will continue to pay out as long as one beneficiary is alive and heirs will be able to collect a portion of the balance.
• Systematic withdrawal.  A simple fixed payment is made to the beneficiary monthly, annually, or quarterly.
• Lump sum.  Only one payment will be made from this account.

Each distribution is considered income by the IRS, and may be taxed accordingly. It’s a good idea to consult a tax professional before making your distribution choice.

So, do you need an annuity?  The answer is: it depends.  Those who have guaranteed income from several different sources may not need an annuity.  However, individuals without a traditional pension who want the security of a fixed monthly payment in retirement may want to consider using some of their savings to purchase an annuity.

Philip Taylor is the author of 104 Ways to Save Extra Money. Read his popular blog, PT Money: Personal Finance for more insightful money tips, like his recent suggestions for the best online checking accounts.