Annuities

Annuities are insurance contracts. You hand the insurance company money, and it guarantees something in return – a steady stream of paychecks, either immediately or down the road. Guaranteed income is a very attractive feature for many retirees, who fear running out of money.

Annuities come in combinations of several basic kinds. There are "fixed" annuities – in which your rate of return is guaranteed within certain parameters – and "variable" annuities, in which your return depends on how well mutual-fund investments perform. Whether fixed or variable, annuities are also either "immediate", meaning they start paying you right after you invest a lump sum, or "deferred", with payments starting at some future date.

Many investments are taxed year by year, but the investment earnings—capital gains and investment income—in deferred annuities aren't taxable until you withdraw money. This tax deferral is also true of 401(k)s and IRAs; however, unlike these products, there are no limits on the amount you can put into an annuity. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs.

Annuities are a unique financial product that can enhance your retirement security by converting an investment into a stream of payments that last as long as you live.

Benefits offered by annuities include:

Tax-deferred growth potential
Guarantees to your principal
The option to take a lifetime income stream
Avoiding probate with a properly named beneficiary other than your estate