Which of the following best describes an annuity? Deposits are made at random (whenever you have extra money) into an account earning interest. A lump sum is deposited into an account earning simple interest. Equal, regular deposits are made into an account earning interest. A lump sum is deposited into an account earning compound interest.

An annuity involves making regular, equal deposits over a specific period of time, allowing funds to grow with interest. This consistent savings strategy is often used for retirement planning, where individuals set aside a fixed amount regularly to ensure a steady income later in life, harnessing the power of interest compounding over time. When managing an annuity, it’s essential to avoid common pitfalls like failing to account for inflation or misunderstanding the terms. Many people mistakenly believe that all annuities are the same; however, there are fixed, variable, and indexed options, each with different risks and benefits. Doing thorough research before committing can help maximize your investment.