Annuity graphWith memories of the stock market's 2008 tumble still fresh in investors minds, many are scared of burning their hands on the stove a second time. Some still sit on the sidelines, avoiding the stock market altogether, while others have gone ultra-conservative, looking for "guarantees" instead of chasing returns.

Because of this, for many, annuities have never looked more tempting. Just read the American Council of Life Insurer's brochure, The Individual Annuity A Resource in Your Retirement, "An annuity can provide a steady stream of income for life, shifting the burden of managing savings from you to your life insurance company. No other personal financial product offers this guarantee of lifetime income." That's the pitch. It's not surprising then that Beacon Research reports that U.S. sales of individual fixed annuities rose to about $19 billion in the first quarter of this year, up 6% from the same period in 2010.

If you're like many people, you wouldn't consider yourself an expert on annuities. Apparently, that's not stopping shell-shocked people -- especially baby boomers -- from seeking low-yield, but stable investments, according to Allianz Life's 2011 Reclaiming the Future study. When asked which is more attractive, a financial product providing 4% return that is guaranteed not to lose value, or one with 8% return that is subject to market risk and loss of principal, 76% of people chose the guaranteed product. And 81% of boomers say their most important goal is having a "stable, predictable standard of living throughout retirement," according to Allianz's study.

Prudential's new survey, The Next Chapter: Meeting Investment & Retirement Challenges, confirms this run to safety narrative: 58% said they've lost faith in the stock market and 44% said they are not likely to ever put more money into stocks. And 40% said they have a conservative portfolio today, compared with 33% pre-recession.

This change in mindset has not been lost on the 401(k) industry: There are retirement income or guaranteed income solutions in many 401(k) plans. An annuity or annuity-type product may be coming to your 401(k), or it may already be there, which is all the more reason to give them a closer look. ACLI's brochure is a good starting point.

Put on Your Thinking Cap

You can carefully analyze the costs, product features and guarantees, but fair warning: "You may never understand everything you need to make a good decision. You will be at the mercy of the person selling you the annuity," says Barbara Roper, director of investor protection for the Consumer Federation of America. "Given the often astronomical costs and potentially harmful features -- such as lengthy surrender periods with high penalties for early withdrawal, consider buying an annuity from someone with a legal obligation and a firm commitment to act in your best interest," says Roper.

"This is not your parent's annuity. The product suite is new, innovative and customizable, a lot different than products available even a few years ago," says Mark Fitzgerald National Sales Manager for Saybrus Partners, a consultancy firm.

Annuities can be quite complicated, and there's plenty an investor can get wrong. The word "annuity" describes at least five different kinds of products that have little in common besides the name, the fact that they are issued by insurance companies, and give the owner the option to convert his or her money to a guaranteed income stream at some future date, says Kerry Pechter, editor and publisher of and author of Annuities for Dummies. Annuities can be fixed, variable, immediate, indexed, and more.

"There is a big difference between the products and their costs," says Roper. "The person selling you the annuity probably doesn't conduct the analysis to determine which is best for you, and instead is likely to sell you whatever their company sells, or the one that pays them the most."

Know the Differences

The main difference between variable annuities and fixed annuities is that a fixed annuity protects your principal from stock market losses, while a variable annuity can lose value when the stock market declines, explains William Smith, president of W.A. Smith Financial Group. A fixed indexed annuity offers a guaranteed minimum rate of return or the return based on an underlying stock index such as the S&P 500, whichever is higher, says Smith. Fixed indexed annuities also provide the contractual promise of guaranteed lifetime income much like a good-old fashioned pension. An immediate annuity provides an immediate income stream with no access to principal in the future.

Be clear on what you're buying and whether it aligns with your goals.

Some annuities have up to 10-year surrender periods, and high penalties if you want to get out of the investment sooner.

Do They Belong in Your Portfolio?

Annuity grassHow might annuities fit into your retirement plan? "They should not be used as an equity alternative, since they are not designed to compete with the stock market or to have tremendous gains," says Ryan Peterson, president at Wisdom & Wealth Solutions. "They should be a long-term vehicle to provide a base guarantee of return and lifetime income in retirement above CDs or other guaranteed income products."

In other words, while perhaps they should be a part of the plan, they definitely shouldn't be the entire plan.

Think twice about a deferred variable annuity unless you're confident you won't need the money for at least 10 years, says Steven Weisman, professor at Bentley University and author, The Truth About Buying Annuities. And don't consider an annuity until you've maxed out your IRAs and 401(k)s, he says. "Tax deferral is good. Paying no taxes is better. A Roth IRA always beats an annuity."

Figure Out the Fee Structure

Then there are the fees -- some clear, others hidden. The cost of a variable annuity, for example, varies from 2% to 4% of the investment, according to Pamela Green, an annuity specialist at Sapient Financial Group.

"You may be told that you aren't paying a commission, and technically, that may be correct," says Weisman. However, the agent selling may receive a commission of 4% to 15% from the company issuing the annuity, which essentially passes this cost to you through annual fees."

There are mortality and expense charges which cover the life insurance component of the annuity; investment management fees, contract maintenance fees and more. These fees can drastically eat into the value of the annuity. There are some companies, like Vanguard that sell annuities with low fees," says Weisman.

Beware of bonus annuities. "It sounds nice to get an upfront bonus, but those bonuses come with additional fees," says Carole Peck, a certified annuity specialist. "Ask to see the cost of an annuity without the bonus option. Each company has a different fee schedule, so it's important to ask."

In fairness, John McCarthy, CPA and product manager, Advisor Software, Annuity Solutions for Morningstar (MORN), says there are misunderstandings about fees. Most people compare a variable annuity to a mutual fund, he says, but that is only half the picture, because a mutual fund does not offer guaranteed living or death benefits. The actual fees of the sub-account investments (mutual funds) are typically lower than their stand-alone mutual fund counterparts. As for the guarantee, that's where the extra cost comes in. There are two types of guarantees: first, a death benefit which gives your estate the ability to recover any lost investment value should you pass away while the account value is below your initial investment value; and second, a living benefit guarantee, which commonly offers payments for life, regardless of whether the investment completely tanks, he explains.

The bottom line: "Ask yourself if the benefits are worth the cost? The answer depends in part on your risk tolerance, portfolio size relative to cash flow needs, and proximity to retirement," says Mitch Kauffman, a certified financial planner with Kauffman Wealth Services.

Know Who You're Getting in Bed With

Annuities are only as safe and conservative as the company issuing them, says Weisman. Always research the strength of the company and its rating with the major rating services like A.M.Best Co., before buying an annuity. "They will let you sleep at night. By investing in an annuity, you may be able to invest more aggressively in other parts of your portfolio," he says.

Annuities are not FDIC insured. "They are backed by the underlying insurance company. Understand insurance protection limits if the company fails. Coverage amounts vary depending on where you live. Coverage is at least $100,000 in most states," says Roman Ciosek, managing director and partner at HighTower Advisors' Strata Wealth Management.

Is a 401(k) the Place for an Annuity?

Eleanor Blaney, consumer advocate for the Certified Financial Planning Board, is blunt, "This is categorically a bad idea." For one, if 401(k) plan loans are an attractive feature, realize that you may not be able to use your annuity benefit to provide a loan, says Thomas White, a partner and member of the employee benefits practice group with Arnstein & Lehr. It may also be impossible to move the annuity to another plan or to an IRA upon termination of employment.

Pechter's view is more nuanced. Much depends on the precise kind of annuity the 401(k) offers, he says: They may be cheaper than retail annuities, because there are often group rates. But McCarthy suggests that a variable annuity inside a 401k can replicate a defined benefit pension,

Consider the Advantages

Mike Terrio, president of The Terrio Group, says annuities' lifetime income guarantees and upside growth potential are real benefits. But the biggest advantage of annuities is that they allow you to save money on a tax deferred basis, says Weisman. Unlike other tax deferred investments, such as IRAs and 401(k)s, there are no annual contribution limits.

Laddering fixed immediate annuities can be an effective strategy to take advantage of rising interest rates and obtain a higher monthly annuity payout, says Weisman. Because annuities have beneficiaries tied to them, they are free of any probate fees or delays passing the funds to beneficiaries, which is another plus.

Insurers are seizing the moment to promote annuities. For example, this month, New York Life is launching its Guaranteed Future Income Annuity, a deferred income annuity which offers consumers an opportunity to create their own personal pension.

Annuities aren't the simplest solution, but worth a second look. Shaky-kneed investors, study up.

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A word to Sully: Since you sell Annuities for a living, you have (by default) a warped sense of their value / practicality for many investors!

The seller of annuities (you) get payback instantly and again over time. The buyer, must wait YEARS before seeing anything!

A few questions for you:

If a client came to you today and handed you $100,000 to purchase one of your products, what is the interest "guarantee" he/she would be offered, and for what period of time?

If that client had some sort of hardship 2 months from today, and had to reclaim his/her investment, how much would be returned? How about after 12 mos, 24, 36, 60? Why is it tht we see TV commercials of firms who will buy out people's annuities (at steep discounts) who find themselves in such situations?

Suzy Orman averages about 7 million people watching her shows ... when is YOUR show on and how many books have you written on Investing or Money Management? If you don't care for Suzy, kindly do some research on what some other folks say about annuities: Jim Cramer, Bill Gross, John Bogle for starters .. can they all be all misinformed?? Answer: NO

Read the thread of replies in this article - how many support your pro-annuity views? Your typical reply to all is that they don't know what they are talking about, they don't sell insurance or are otherwise unqualified. Wale up, Sully, smell the roses!!

I would agree that SOME people might be good candidates for annuity purchasing; the problem is way too many people buy these things not really knowing what they're getting into,

Again, here's $100,000 .. what can you offer - today - percent-wise and duration for one of your slick offerings .. and yes, how much will my $100,000 "investment" be worth next Monday - on the open market?

That $100,000 would be far better off being invested in a good balanced mutual fund or dividend paying quality stocks -- at least the owner can access it - even add to it over time.

Sully - be honest - if it wasn't annuities that you've been peddling these past 36 years, would you have been a used car salesman? Perhaps you are BOTH!

July 08 2011 at 12:57 PM Report abuse +1 rate up rate down Reply
4 replies to hgeorgech's comment
Jekyll Island

Before slamming Annuities as an investment in retirement please see HealthView Services research on the subject;

Health Care is going to be the largest expense most retirees will have; it will eat up all of their Social Security, without some form of other income people will go bankrupt in their old age

July 08 2011 at 9:43 AM Report abuse -1 rate up rate down Reply
1 reply to Jekyll Island's comment

Jekyll ... just maybe, the Amish have the answer (and have had for decades) .. take care of your own; don't ask anything of others! Has worked for them .. think about it!

Sometimes the obvious is staring us in the face all along

July 08 2011 at 10:26 AM Report abuse +1 rate up rate down Reply
Master of my fate..

I'm no fan of purchasing anything (investment wise) from insurance companies, especially annuities.
And of course the Variable life insurance contracts pushed first instead of simple term life.
My advice for people who do not have the knowledge for such things is to get a good financial planner. One who does NOT sell any products, but can charge you a fee for advice.

July 07 2011 at 6:53 PM Report abuse +1 rate up rate down Reply

Yeah bankers make large commisions on selling annuities and you can lose your principle investment as well. If you are in your golden years invest what you have and secure it by goverment backing.

July 07 2011 at 3:05 PM Report abuse +2 rate up rate down Reply
2 replies to thagrus's comment

The only problem is that after inflation and taxes today you are guaranteed lose money on anything with "government backing".

July 07 2011 at 3:20 PM Report abuse +1 rate up rate down Reply

Thagrus, sorry to say but you are wrong in your comment! Banks don't make large commissions on Annuites, and even if they did, why would anyone care what an insurance company is paying the bank when the commission being paid doesn't come from the consumer that bought the Annuity? Not only that, but in an Annuity (Fixed or Indexed), your principal is "GUARANTEED" and is not subject to market fluctuations like Variable Annuities, Stocks, Bonds or Mutual Funds! You should also be aware that most companies have to put up the "collateral" before a state will allow them to sell their Annuity plans, and all states have a "GUARANTY ASSOCIATION" which protects the consumer's Annuities for between $ 300,000 and
$ 500,000 in the event of an insurance company's default! Banks are only covered for $ 250,000 under the FDIC. Know your facts first before making comments like that!

July 08 2011 at 12:09 PM Report abuse rate up rate down Reply

There are a lot of snake oil selling scum out there also peddling "annuities". Watch yourself.

July 07 2011 at 2:00 PM Report abuse +2 rate up rate down Reply

Annuities have been around since the days of the Roman Empire. They were popular with retired Roman generals. Trillions of dollars are currently invested in annuities. As long as you thoroughly educate yourself on how they work and work with a good agent who works in your interest, annuities are viable investments


July 07 2011 at 1:12 PM Report abuse -1 rate up rate down Reply
1 reply to nxston08's comment

Actually no one who has previously commented on this article, except for Sully, really knows very much about annuities. A FIXED annuity isn't complicated and a 5th grader with reasonable comprehension and reading skills should be capable of figuring out how they work. Like everything else they have advantages and disadvantages. It's up to the individual to decide if an annuity is what they want.

July 07 2011 at 2:41 PM Report abuse rate up rate down Reply

Hey hgeorgech, your comment is confusing to me! I have been selling Annuties for over 36 years and have "never" had a client lose one red cent on their Annuity investment unless they surrendered it in full during the Surrender Charge Period, and I think that has been maybe one or two clients that have done that, so why would someone "run" when advised to put money into an Anniuty when the returns are "GUARANTEED" in writing and there is a "minimum rate" paid each year? I'm not including Variable Annuities in this comment, only fixed rate and indexed Annuities. Would love to know why you made that comment!

July 07 2011 at 8:51 AM Report abuse -1 rate up rate down Reply
2 replies to Sully's comment

Sully - it's NO secret that the persons who gain the most when it comes to annuities are the persons selling 'em .. HIGH, up front commissions for starters .. and with interest rates being at ALL TIME LOWS, why would anyone want to lock in paltry returns for years to come? However, you might want to listen to a few people who regularly WARN folks about the perils of annuities .. for starters, listen to Suzy Orman. Would you like 3 or 4 other professional opinions?

July 07 2011 at 3:04 PM Report abuse +1 rate up rate down Reply
2 replies to hgeorgech's comment

"why would anyone want to lock in paltry returns for years to come?"...This is probably the best argument against buying an annuity in today's market.

July 07 2011 at 3:29 PM Report abuse +1 rate up rate down

hgerogeh - For every negative professional opinion, you would get just as many if not more positive opinions about Annuities. Did you even wonder why Bllions of dollars are being invested in Annuities? Did you even wonder why Annuity investments are up 11% during the first quarter of this year? You think we gain the most?
Let me give you an example from a client of mine who bought an Annuity from me in 2000! At that time, one of my companies was paying a "GUARANTEED" rate of 7.25%, locked in for 10 years. That means his money would "more than "DOUBLE" over that period. He put $ 160,000 into the Annuity. I'll tell you flat out, I made a 5% commision on the case, so I received $ 8,000 in compensation. That is "one time", not every year like brokers get off of their client's portfolios. Now in 2010, his Annuity matured with a value of over $ 320,000.
Now if you look at it, I got paid 'BY THE INSURANCE COMPANY" $ 8,000, and when you average that out over the 10-year period he had the Annuity, that means I basically made $ 800 a year, again, not from him. He made over $ 160,000 during that same period, or an average of $ 16,000 per year! So tell me hgeorgeh, how is it that you justify making the comment that "persons who gain the most when it comes to Annuities are the persons selling them"? Explain that one! And then you ask, "Why would anyone lock in paltry returns for years to come"? Well, again, let's go back to 2008 when the DJIA and S+P 500 were down close to 40% overall! If a person that had an Annuity was getting 4.00% then, that is reflective of a "44% DIFFERENCE IN VALUE"! How effective were those so-called "paltry returns" then? I have many clients that have bought Annuities over the years that started with very little, and because of my advice to them, they now have hundreds of thousands or even millions of dollars in their Annuities and couldn't be happier! Never lost one red cent and gained a fortune! Annuites are not for everybody! They are for people who want safe and secure returns with no risk, and for peace of mind knowing that when they go to bed at night, they wake up the nexct day knowing they have more money than they did the day before! And by the way, Suzy Orman is not in the insurance business, and anyone that is not that claims to be "knowledgable" about Annuities when they are not in the business, well, their opioion should be taken with a grain of salt. You don't have your doctor give you legal advice! You don't have your Accountant give you medical advice! So why would you let someone that is not in the Insurance Industry give you advice about Annuities? Doesn't make sense! Suppose I tried to give a client tax advice when his accountat recommended something that was best for him? Who do you think he should listen to? The Accountant of course! Same thing applies here, so I or anybody else should not really care what Suzy Ormam or other people have to sya about Annuities when they are not truly qualified to do so. Got it?

July 08 2011 at 12:01 PM Report abuse -1 rate up rate down

Here is why you the investor must be leery of annuities. First off, many pay the broker a large commission - as high as 10-14 percent. Think about it -- you invest $100,000 and the broker makes $14,000 in commission. That commission must come from somewhere, and it comes out of your investment performance.

This is one of the reasons that some annuities have what's called a surrender charge. A surrender charge is a charge applied to your annuity if you elect to withdraw early from your contract. Withdrawal charges can continue on for 10 to 14 years!!

Ask yourself this: Is there anything that you want to be forced to keep for 10 to 14 years? At the paltry rates now and likely ahead? The only way out is to pay a hefty surrender charge. Investors need to realize that this can happen for variable annuities AND fixed annuities as well.

Another trick that the insurance companies play is that they tie the bonus to something like a requirement to annuitize the contract with the company to keep the bonus. Some companies only give the bonus as a death benefit.

No matter what your broker or sales agent says, ask for it in writing, and be sure to read the fine print. Ask yourself, if an insurance company is paying five or six percent for an extended period of time or giving some great bonus, how can they do that if a 10-year U.S. treasury note is paying only 3.4 percent or so? On top of that, don't forget that the insurance company has to pay the agent its big commission, there are wholesalers who also get an override on business in their region, the company must pay someone to invest the money at the insurance company, and all the other employees involved in the process along with making a profit. You know the saying, if it sounds too good to be true, it probably is.

Lastly, when you do end up selling that annuity it will be taxed as ordinary income, not the preferred lower capital gains rate. If you're under 59 and a half, also be prepared to pay a 10 percent IRS penalty on the gain above the principle. I think if annuities weren't sold by salespeople, no one would buy them. Be sure you understand what you're being sold before you buy it. You don't want to be stuck in something that will cost you to get out of. If it's so good, why do they have to put the surrender charge on it anyway?

July 07 2011 at 3:19 PM Report abuse +1 rate up rate down Reply
2 replies to hgeorgech's comment

Everything you've written here is essentially correct, but you are comparing apples-to-oranges. I would compare annuities to CD's, treasuries, or TIPS. I think that the best investments today are blue chip, dividend paying stocks, However, there are many people who just don't have the stomach for equities.

July 07 2011 at 4:05 PM Report abuse +1 rate up rate down

First of all hgeorgeh, I don't know where you get your information from, but you are clearly way off in what you said, so let me clear it up for you, and I say this because I have been selling annuities for over three and a half decades so I think I am pretty qualified to say this.

Agents/Brokers dont' get paid 10-14% on Annuities! That's ludicrous! I am licensed in both NY and Florida, and the highest commission I have ever made on an Annuity was 7%. Some companies offer slightly higher ones, but in many cases the product doesn't fit the individual's situation, and that is why commissions as far as Annuities don't really matter. I have always taken the position that the Annuity plan I propose to a client has to fit their situation and what they want to accomplish. Once that plan is enacted, I get paid a commission, but I really don't even know what it is until I get it. In NY, the commission rates are generally around 2-5% depending on the plan. What people need to know is that the commission that is paid "does not come out of the investment made"! If you put $ 100,000 into a Mutual Fund, there could be an "upfront" loading fee (commission) of let's say 4%, and that come out of the $ 100,000, so right away, the client's investment value is down to $ 96,000. In an Annuity, that doesn't happen! All $ 100,000 earns interest, so if the client gets 4%, the value at the end of the year is $ 104,000, Now people will say that the company builds in Surrender Charges (SC). Yes, they do! However, they only apply when you withdraw more than 10% of the value in any year during the SC period. There are no SC if you take an income after one year, if the client dies, is confined to a Nursing Home for more than 90 days or is disabled. Annuities are designed for people who want to keep their money safe, get "GUARANTEED" returns, and are not planning on withdrawing the whole amount for a specified number of years. If someone is looking to put their money away for let's say three years, and then pull it all out, don't get an Annuity. It's that simple!
If they want to put it away for five years or longer, keep it safe and get "GUARANTEED" returns, then an Annuity is the perfect choice. The agent's commissions do "not" come out of the client's investment, so you are dead wrong there! Not only that, but people are not "forced" to keep their money for 10-14 years! They "elect" to keep it that long when they buy the Annuity because they don't need it until later on! Plus, the wholesalers get paid by the insurance company, again, not out of the client's investment. How do insurance companies determine what they pay out in interest? They buy bonds! If the bond is yielding let's say 5%, the company might keep 1% of that and pay the client the other 4% in interest on the Annuity.
People should only buy Annuities if it fits their goals, needs and risk propensity (safe and secure), and for the time period that they need it for! Simple as that hgeorgeh! Do your homework first

July 08 2011 at 11:38 AM Report abuse -1 rate up rate down

In a word: NO

When your advisor suggests such an "investment" .. RUN, don't walk to the nearest exit!

July 07 2011 at 8:03 AM Report abuse +2 rate up rate down Reply
1 reply to hgeorgech's comment

Wow. Ignorance is bliss isn't it? I too have worked in this industry for years and can tell you that while there are some truths to many of the things you are saying, you clearly have been mislead in why these contracts exist and how they should be positioned. Their is always going to be an opportunity cost to any and all investments. Most often one of those costs is time. As an advisor such costs can be offset by proper planning with other vehicles/investments.

I would also like to point out that something that often gets overlooked in planning is leveraging one's assets. If an insurance carrier is offering a guranteed rate or income stream, a client can leverage a portion of their portfolio to acquire such benefits- giving the remaining portfolio the ability to grow uninhibited by withdrawals or the fear that the portfolio/income may be depleted to market fluctuations.

And if annuities are so bad, what investment would you suggest as an alternative?

July 12 2011 at 9:46 AM Report abuse rate up rate down Reply
Paul Petillo

While I am not a big fan of annuities - too complicated and too costly and too much insurance - I was surprised by the following when asked about them in 401(k) plans: "Eleanor Blaney, consumer advocate for the Certified Financial Planning Board, is blunt, "This is categorically a bad idea."" Of all people, women benefit the most from annuities in these plans. They don't discriminate based on sex. They give women the conservative approach many say they want - and the knowledge of knowing what they will have - and gives them the opportunity to educate themselves about other potential investments available to them. Plus, it eliminates the choice at retirement that most people can't make. Studies have shown that if the markets are good in the months preceding retirement, the retiree will more than likely opt for investing on their own; if they are bad, they buy an annuity. Stuffing them in every 401(k) can help men make the right choice for their wives - who will live longer and benefit from them!

Paul Petillo
Managing Editor of

July 06 2011 at 8:17 PM Report abuse rate up rate down Reply
Henry ptnm

Are annuities right for retirement? No. I am retired and I had one and I lost money on it. Annuities go by stock market. I had it rollover to an IRA. No more problems with that.

July 06 2011 at 3:25 PM Report abuse +2 rate up rate down Reply
1 reply to Henry ptnm's comment

Hey Henry, if you lost money on an Annuity, all I can guess is that you put it into a Variable Annuity which is the only Annuity that can suffer losses in the stock market. Fixed and Indexed Annuities have a "minimum guarantee" that is paid so that you don't ever lose value in your Annuity. Plus, Fixed and Indexed Annuities don't have "fees" like Variable Annuities do.

July 07 2011 at 8:45 AM Report abuse -1 rate up rate down Reply