Annuities gain more attention from retirees

But New York Life, one of the leading writers of annuity contracts, says its sales have jumped significantly. "We should top $600 million this year," twice 2004's volume, Mr. Pasteris says. "I think there's a lot of room left on this."

Experts point to several key choices for potential annuity buyers to consider:

•Shop around. "You need to do a comparison," says Frank Congemi, a financial consultant to seniors in Deerfield Beach, Fla. "Read the fine print."

•Cover essential expenses. List your monthly spending, and match it against the income you'll receive from Social Security and other sources. An annuity is one way to fill any gap. Once your basic needs are covered, you may feel less worried about the risks of investing other assets in stocks.

•Consider starting slow. You don't have to make an all-or-nothing decision on annuities. You can buy several over the years. That gives you time to learn more about your retirement needs. If interest rates rise, you'll be able to buy higher-paying annuities. And the industry will keep innovating with new products.

•Choose from top-flight providers. State guaranty associations will try to protect customers if an insurance company goes bust, but it's wise to minimize the risk of default. Look for insurers with rock-solid credit scores (AAA or A++) from A.M. Best, Moody's, or Standard & Poor's. "The solvency of the carrier is a very important factor," says Rick Miller, a financial planner in Cambridge, Mass. Vanguard is one appealing provider, he says, because the mutual-fund company has carried its tradition of low costs and clear communication over into a full line of insurance products.

•Set your priorities. Each additional feature comes at a cost. Some, such as inflation-protection, may be worthwhile. But remember, Mr. Congemi says, "There's no such thing as a free lunch."

Annuities come in more flavors than Baskin-Robbins ice cream. You won't find "butter pecan" on this menu, sorry to say, but there are far more than 31 choices.

Before making a choice, a good place to start is understanding plain vanilla: an immediate fixed annuity. You pay a premium, and in return, you immediately begin receiving fixed monthly payments from the insurance provider.

Annuities with different features come at a cost – generally lower initial payouts. Here's the scoop on some of those options:

Joint and survivor benefits. Providers allow retired couples to choose an annuity that guarantees income for the duration of both of their lives, not just one.

Inflation indexing. This addresses one of the biggest retirement risks – that inflation erodes one's purchasing power. A fixed payout is probably a diminishing payout. Companies like Vanguard offer annuities that adjust every year based on the government's consumer price index (CPI). A 67-year-old couple, putting $300,000 into an annuity, would get $1,238 per month initially from an inflation-protected annuity, versus $1,774 from a regular fixed annuity, according to Vanguard's Patti Colby. But by year 10 and beyond, the indexed annuity could have a big edge.

Annual increases. This is another approach to the inflation challenge. Again the payment starts on the low side, but rises by a preset amount such as 3 percent or 5 percent a year.

Cash out. This option will appeal to people who fret about losing control of the money they plunk down for an annuity. New York Life, for example, lets customers withdraw 30 percent of their remaining payouts in one chunk. They can do this after 5, 10, or 15 years.

Death benefit. Many people hope to leave money to their children, and this feature provides for an amount to go to heirs, such as 25 percent of the initial premium. But that means the payouts during retirement will be smaller. People with limited means may need to focus just on their own income, financial planners say. And wealthier people may find other ways of planning for their heirs.

Equity indexing. This option typically provides a low minimum payout, which will rise higher if a major stock index goes up. The concept sounds great, but be sure you understand the specifics before choosing this. Downside protection, for example, will be offset by some restraints on the upside gains.

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