About Annuities: They're Not For Every Investor

Annuities are long-term financial investment contracts that are designed to be a source of retirement income. Insurance companies sell them. As with any investment, before you buy, learn if annuities are the right choice for you and, if so, about the combinations of options that are available.

Think About…

Do you want to pay one lump sum or make payments over time?

If you buy a single premium annuity, you pay one lump sum. If you later wish to invest more money, you need to buy another annuity. A flexible payment annuity allows you to make on-going contributions any time you want.

Will the amount you receive stay the same or change?
Fixed annuities pay a guaranteed amount for a fixed period of time. Once the time has expired, the company sets a new rate that may be higher or lower than the original rate. Generally, the annuity has a guaranteed minimum rate. Your risk for a fixed annuity is lower, but the payout may be less. Sometimes the attractive introductory rate doesn't last long and you may get locked into a lower interest rate.

Variable annuities are linked to the stock market's rise and fall so the amount you receive changes. The money you receive will fluctuate the same way that the underlying investments in stocks, bonds, or mutual funds do. Some "equity indexed" annuities may have a guaranteed minimum rate; others may not give you a specific rate of return.

Warning: Variable annuities are not for those already retired or near retirement. Their purpose is for retirement savings to grow tax-deferred over an extended period of time. For more information, see the National Association of Securities Dealers web site at www.nasd.com.

When will you begin receiving payments?
You can select from a variety of payout options: monthly, quarterly, or annual payments starting immediately or starting some time in the future. Annuities are tax-deferred, not tax-deductible. Your money earns interest without your having to pay taxes. However, when you do start drawing from the annuity, you will pay taxes on the interest so consider the tax implications of your payout choice. For example if you are under 59½ and make a withdrawal, you will pay a 10% penalty.

How long will you receive payments?
You'll need to determine if you want payments for as long as you live, for as long as both you and a survivor live, or for a fixed time. The longer the time the insurance company must make payments, the less each payment would be.

Types and Options

While many annuity combinations and payout options exist, here are the most common.

• Single Life Annuities provide you with a monthly, quarterly, or annual income for as long as you live. The payments are calculated based on your predicted life expectancy. If you die before reaching your life expectancy, the insurance company keeps the extra money. On the other hand, if you outlive your life expectancy, the company pays the extra cost.
• Life or Period Certain Annuities make payments to you all your life or for a fixed number of years, whichever is longer. For example, if you arranged for ten years of payments and you die before the ten years, your beneficiaries inherit the rest of the money. If you live longer than ten years, you get payments for your entire life. However, if you die in the eleventh year, your beneficiary gets nothing.
• Joint and Survivor Annuities make payments all your life and that of your beneficiary. The size of your check determines how much you choose to leave for the beneficiary. The more you leave for your beneficiary, the smaller your check will be while you are still alive.
  

If You Buy…

• Research the fees. Make sure the reputation of the insurance company is sound. Some commissions can be very high. Do not pay more than 2% annually. The commissions and surrender charges for switching annuity options can eat up investment advantages.
• Compare costs. Costs among companies may vary for the same amount of income. It may be less expensive just to purchase life insurance if money for your survivors is important, Or, if you're concerned about income to pay for nursing home care, perhaps buy long-term care insurance.
• Don't mix 401(k) investments and annuities. You may lose tax deferment benefits.

AARP Resources
Financial Planning
AARP's home page for a wealth of financial planning information
URL: http://www.aarp.org/financial

Social Security Center
AARP's home page on Social Security, including a retirement planning calculator
URL: http://www.aarp.org/socialsecurity

Additional Resources
U.S. Consumer Information Center (Pueblo)
The pamphlet "About…Annuities" offers a detailed look at how annuities work and some aspects to consider in choosing whether to buy one. It includes a quiz to help you determine whether you should consider an immediate or deferred annuity.
URL: http://www.pueblo.gsa.gov/cic_text/money/annuity/annuities.htm

Securities and Exchange Commission
The SEC's "Variable Annuities: What You Should Know" offers complete information about all aspects of variable annuities.
URL: http://www.sec.gov/investor/pubs/varannty.htm

H.E.L.P
Expert reports on annuities are found at this Web site: What to watch for and examples of bad claims that are used in selling annuities.
URL: http://www.annuitytruth.org