A Paycheck in the Mail Every Month

For lifetime income, seniors should look at annuities

How does a monthly check for life sound to you? To many retirees, caught between a roller-coaster stock market and shriveling interest rates, it sounds like security. A lifelong payout is the promise of an immediate--or income--annuity, and more Americans are buying them. Last year, $3.8 billion of these annuities were sold, and sales jumped 30% in the first half of 2001.

Unlike deferred annuities, which people use to save for retirement, income annuities are for parceling out money already accumulated. Purchasers turn over part of their savings to an insurance company in return for a monthly check. Because interest rates are low, payouts are not high. Still, at a time when surviving to 90 is not unusual and living to 100 is a possibility, this guarantee has its appeal.

Retirees once relied on company pensions for lifelong income, but fewer firms now offer them. They're moving to 401(k) plans, which have no guarantees. "This is the only thing that can bring lifetime income other than a pension or Social Security," says Farrell Dolan, an executive at Fidelity Investments Life Insurance.

Income annuities come in two flavors--fixed and variable. The fixed annuity guarantees a set monthly, quarterly, or annual sum. Put in $100,000 now, and if you're a 70-year-old man, you'll get about $887 a month for life, according to WebAnnuities.com, which tracks average payouts. Remember, part of that money is your own principal, since you don't get it back at the end. Studies have shown fixed annuities pay somewhat less than Treasury bonds for the average purchaser--less if you die young, more if you live long. Think of them as insurance as much as an investment.

CHOICES. A variable annuity lets you choose stock, bond, and money-market funds in which to invest your stake. Its selling point is that it can help you keep up with inflation. (One company, TIAA-CREF, will soon give the option of an inflation-linked bond fund.) But anyone who has watched the stock market lately knows you can lose money, too, so your payout can fall. Some variable annuities offer a minimum payout. Or you could create your own floor by splitting the money between fixed and variable plans. Also, with a variable annuity, you need to compare investment fees as well as sales charges. With fixed annuities, payouts are net of fees.

After you decide which you want, lots of choices remain. You can buy an annuity that pays only during your lifetime or one that continues until the death of the surviving spouse. You can opt for a feature that guarantees checks for at least 5, 10, 15, even 20 years, regardless of how long you live. This prevents the scenario in which you buy an annuity one day and die the next--and the company keeps it all. With a guaranteed period, your heirs collect the remainder. This protection comes at a price: the 70-year-old above would get only $700 with 20 years certain.

Investors deciding how much of their living expenses to cover with an annuity face a major hurdle: inflation. Unlike Social Security, annuities almost never adjust for it. A $1,000 monthly payment will feel like $412 in 30 years if inflation runs at a 3% annual rate, warns Shane Chalke, CEO of AnnuityNet, one company offering an inflation-adjusted annuity. Initial payments are lower, but grow with inflation.

If you have more than $2 million in assets, you're unlikely to outlive your money and may not need an income annuity. If you're in poor health, this insurance against long life might not be advisable. Hearty retirees who want this protection should shop around. Payouts can vary by 15% or more for the same product, says Joe Rosanswank, editor of Comparative Annuity Reports. And be sure to buy from a company with a top credit rating from Moody's (MCO ), Standard & Poor's (MHP ) or A.M. Best. One last caveat: Because interest rates have dropped, you'll lock in lower payments if you buy today. One way around this is to put part of your money in now, then buy another annuity if rates move higher.

With income annuities, you won't get rich. But at least you won't die penniless.

By Carol Marie Cropper

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