Annuities solve some key challenges for retirees. Chiefly,
some provide fixed income that does not fluctuate with the
market. Some offer a death benefit for your heirs. Some offer
income that you can't outlive. Some offer income that you and
your spouse can't outlive.
Drawbacks? Many annuities are inflexible. Many are complex.
And many have high fees.
Also, surrender charges are commonly levied when you withdraw
money from a variable annuity within six to 10 years of setting
it up. The charge is usually a percentage of the amount
withdrawn. It is often 7% in the first year, 6% the second and so
Some contracts let you withdraw up to 10% or 15% without
charge each year.
"Fixed annuity disclosures are typically one to four pages in
length," said Ken Nuss, CEO and of AnnuityAdvantage.com. "They're
relatively easy to digest and understand. But a variable annuity
prospectus can be 300 to 400 pages long."
So if you are in or approaching retirement and want to
consider buying an annuity to meet your income needs, answering
some basic questions will help you decide which type of annuity
How soon do you need income from the annuity? If you need
income right away, tilt toward an immediate annuity. In these,
you pay for the annuity, and payouts to you start within a
A deferred annuity's payments start at a specified time in the
future. You pay in small increments over time until your benefits
Immediate annuities generally have a better reputation than
deferred annuities. They tend to be simpler. Fewer options
translate into fewer fees and hidden costs.
Do you need a set amount of income? If so, you will likely be
better off with a fixed annuity. Payments are at intervals, such
Variable annuities invest in mutual funds or other securities.
The annuity payments depend on the investments' performance. Some
rise and fall over time as the underlying portfolio grows or
"If you're comfortable taking some risk in exchange for
possibly receiving bigger payments, a variable annuity may be
right for you," said Thomas Hewitt, a product manager in
retirement income products for mutual fund family Vanguard
Vanguard has a reputation for competitively priced annuities.
Its variable annuities hold low-cost Vanguard funds.
The third option is a hybrid format. Indexed annuity payments
typically are based on an underlying benchmark, such as the
S&P 500. That part of the payout can vary over time. In
addition, the annuity may offer a fixed amount such as 1% of your
Payouts for each of these styles can last a set number of
years or for your lifetime or a couple's lifetime.
Once you've decided how soon you need income and how much risk
you'll tolerate for a shot at a potentially higher payout, you
can mix and match additional features. You can buy an insurance
death benefit, for example.
Calculators at several websites help you compare
Compares cost of competitors' variable annuities to
Shows how much income various annuities would provide.
Lets you compare annuities based on features such as yield to