Annuities gain more attention from retirees

The arcane insurance products called annuities are winning new attention and taking new forms as America's baby-boom generation heads toward retirement.

If the 1990s were about dotcom stocks, a dawning era of American finance appears likely to focus more on nuts-and-bolts practicality – how to guarantee a steady stream of income that won't run out during one's golden years.

That's what many annuities are designed to do. They are contracts that, in their simplest form, provide a regular check as long as a person lives. One version, growing in popularity, will step up its payments like Social Security does to keep pace with inflation. Another will ratchet up payments if the stock market rises. And some will allow participants to adjust the cash flow based on their expected needs.

So far, annuities are better known to financial advisers than to the baby boomers who are beginning to turn 60. But some insurance companies are already clocking a big rise in annuity sales, and several factors promise to make these fixed-income arrangements increasingly prominent in the years ahead.

It's not just that America will have a record number of retirees. It's also that the landscape of retirement has changed. People are living longer, and employers are dropping traditional pensions with fixed benefits, leaving workers to save mostly for themselves in 401(k)s, IRAs, and other retirement vehicles.

"The trend for the last 20 years ... has been 'asset accumulate,' " says Paul Pasteris, senior vice president for retirement income at New York Life Insurance Co. For the young or middle aged, "that asset-accumulation phase makes a lot of sense."

When retirement comes, a new phase begins: turning that accumulated wealth into cash flow – and making sure it doesn't run out.

Many retirement planners say the best course will often involve a mix of stocks, bonds, and annuity income.

Most retirees don't have enough assets to live purely off dividends from their stocks, bonds, or mutual funds. They also need to draw down their principal over time. With that strategy, the risk of outliving their assets is very real.

Fixed annuities can offer a significant measure of safety.

You hand over a chunk of savings to an insurance company, and in return receive a stream of income for as long as you live.

"Risk pooling" allows an insurance company to offer customers a bigger check each month than they could safely pay from their own savings. Think of it this way: An individual needs to plan for the possibility of living much longer than the average life expectancy. The insurer can assume that its clients, as a pool, won't exceed the expected life span.

One place to check the possible payout from an annuity is the website www.immediateannuity.com. Run by an annuity broker, the site has a free calculator where you can plug in your parameters. A 65-year-old woman in Illinois, for example, might receive $7,800 per year in income for a one-time premium of $100,000. It's a "fixed" annuity because the payment is specified up front, and "immediate" because the payments start as soon as she pays the premium.

Compare that with trying to generate the same income from bonds. Currently the yield on a 10-year Treasury note is about 4.7 percent – which would mean a $100,000 investment would return $4,700 per year. Spend more than that amount, perhaps to keep up with inflation, and the principal will erode until it eventually runs dry.

Despite their benefits, annuities haven't been wildly popular. For one thing, many people confuse income-oriented annuities with another kind, "variable annuities," that are marketed as vehicles for tax-deferred investing. Those can be useful for some people, but experts warn that they can come with exorbitant fees.

Fixed annuities also have drawbacks. The decision to buy is generally irrevocable. A person who dies one month after spending $100,000 on an annuity could lose nearly the entire amount from his or her estate. Put another way, the rate of return typically depends on how long the purchaser lives.

Overall, fixed annuity sales are hardly soaring. They totaled $79 billion in 2005, about the same as in 2001, according to the Insurance Information Institute.

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