Uncover the Fine Print on Annuities

According to the National Associationfor Variable Annuitiesand the US Census Bureau, citizensage 50 and older make up 27% of theUS population. That same age group representsalmost half (48%) of first-timeannuity purchasers.

The reason is simple. Having experiencedsignificant investment growth duringthe 1990s, older investors are lookingfor a vehicle to provide them income tosupplement expenses. They've turned tovariable annuities, products that combine amutual fund type investment account withlife insurance and certain tax advantages.

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Many, however, are now reading thefine print on their variable annuities andaren't happy. According to a report, some have found that theyare unable to utilize most of their moneyuntil they reach age 85. In other cases, initialinvestment amounts have fallen by40%. As a result, annuity purchasers whosought a source of current income havefound themselves draining other savings.

Knowledge is Power

Kiplinger's

But this doesn't mean that annuities arebad. According to an article in ,you simply need to know what to buy andhow much to invest. For example, youshould consider immediate annuities,which are purchased when you retire toprovide an income stream. These types ofannuities pay you a fixed amount ofmoney every month for the rest of yourlife. The key, however, is not to tie up toomuch money. Some financial experts recommendinvesting no more than 30% ofyour assets in an immediate annuity. That'sbecause once you buy an annuity, you usuallycan't get your money back.

To determine how much you shouldinvest in an annuity, simply add up all youressential monthly expenses and then subtractall guaranteed sources of incomethat you receive. If the guaranteedincome falls short of meeting your monthlyexpenses, consider making up the differencewith payments from an annuity.You'll have peace of mind knowing thatall of your regular expenses are coveredand the confidence to utilize some of yourremaining assets in stock and bond mutualfunds, as well as savings accounts.

Know Your Options

Kiplinger's

Your next decision is whether to purchasea fixed or variable annuity. As discussed,a fixed annuity means the monthlyamount you receive will never change.That certainly can provide stability inretirement, but as the article in points out, the fixed amount will certainlybe eroded by inflation over time. Unlessyou have additional investment assets tohelp defray the inflation tide, that couldbecome a real concern.

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A variable immediate annuity has thepotential to solve that problem, but itmight cause other problems. With a variableimmediate annuity, your monthlypayment is linked to the performance ofinvestments inside your annuity contract.Over the years, your monthly paymentscould rise, fall, or fluctuate. Depending on your sensitivity to risk,you might need a strong stomach to ridethis payment roller coaster.

As a happy medium, notes the article,some retirees layer a variable immediateannuity on top of a fixed one. This providesthem with the opportunity forgrowth but the security of a guaranteedfloor. If your risk tolerance is low, or theneed for a minimum monthly income ishigh, this might be the way to go. Andwhen you're ready to buy, Web-Annuities.com can help you compare payoutquotes for fixed immediate annuities.

Keep in mind, however, that interestrates are currently at 40-year lows. Ifyou purchase a fixed immediate annuitynow, you'll be stuck with that low rate.With rates so low, you might want toconsider a variable immediate annuity,or at least wait a few months to see ifinterest rates begin to climb again.Either way, talk to an advisor and assesswhich form of annuity will work bestfor you.