Should I put $900,000 in a variable annuity?

(Money Magazine) -- Question: I'm 62 and have accumulated about $2.6 million in retirement savings, which is invested in stocks and bonds. My adviser suggests that I take a third of this money and invest it in a guaranteed 6% income variable annuity. The cost of the 6% rider is 0.95% of the account balance per year. Do you think this is a good idea? --J.H., Lansing, Michigan

Answer: In theory, I like the idea of putting a portion of one's nest egg into an annuity that can generate guaranteed income for life -- assuming, of course, that you actually need more assured income than you'll get from pensions or Social Security.

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005)

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But how well such a strategy works depends on, among other things, what kind of annuity you choose and how much of your money goes toward fees.

When it comes to getting lifetime income, I generally prefer a type of annuity known as an immediate annuity. Essentially, you hand over a lump sum to an insurer and in return get monthly payments for life.

This type of annuity usually provides the highest level of lifetime income, although you need to be aware of some caveats. After you hand over the money to the insurer, you typically no longer have access to those funds for emergencies and such.

And when you die, the payments stop (although there are some immediate annuities that have refund options or continue payments to an heir if you're willing to accept less income). Which means if you buy this kind of annuity and get hit by the proverbial bus soon after, you may have given up a lot of assets for only a few payments.

Still, if your goal is to create a reliable income stream that will last for life and supplement Social Security and whatever money you'll pull from your assets, I think this type of annuity has much to offer.

Based on what you've described, your adviser appears to be recommending a variable annuity with a guaranteed lifetime withdrawal benefit (GLWB). There are lots of variations, but this type of annuity also guarantees lifetime payments.

The initial payment is lower than an immediate annuity's, but a variable with GLWB offers the potential for payments to rise if the investments within the annuity return enough to offset the income that's paid out as well as the fees. Boosting those payments can be a tall order, though, as the fees in these puppies can get pretty steep.

Putting a portion of your money into this type of annuity can provide you with guaranteed lifetime income, but I think it's an expensive way to go. That said, I included a variable annuity in one of the scenarios in the story I mentioned earlier, although I suggested pairing it with an immediate annuity rather than using it on its own.

So what's this all mean for you?

Well, given the amount of money involved I think you ought to take a step back and start with this question: How much income do you need your savings to generate, and what are the different ways you can get that income?

If you're working with an adviser, I think it's reasonable to expect that he or she lay out several alternatives -- no annuity, an immediate annuity, a variable, an immediate and a variable -- along with the pros and cons of each. Some projections of income payments and account balances in different scenarios wouldn't hurt either. That way you can evaluate the risks and rewards of different approaches.

You'll have to decide whether your current adviser -- who stands to earn a big commission on the annuity sale -- is up to giving you a sufficiently objective rundown of the alternatives or whether you need to talk to someone not so tied to this type of annuity.

Variable annuities can be mind-numbingly complex, so you'll also want to make sure you really understand how the one you're considering works -- and what you're paying for it.

You especially need to know the ins and outs of that 6% guarantee. Is it the percentage that will be used to calculate your income? Is it a guaranteed return that will be applied to the annuity's "income base" -- i.e., the hypothetical account value on which income payments are based? Is it both? What happens if you decide to draw more than the guaranteed amount in a given year?

As for fees, you mention 0.95% for the 6% rider. But unless this annuity is unlike any other I've seen, I can assure you that you'll pay a lot more than 0.95%. Variable annuities also typically levy insurance charges of 1% to 1.25% per year, if not higher. And you'll also have to pay the investment management fees for the annuity's "subaccounts," or mutual fund-like investments. The tab on those can run anywhere from 0.5% to 2%. Add them all up, and the fees can sometimes hit or exceed 3% a year.

Bottom line: I suspect you need to know a lot more about this annuity, as well as alternative strategies, before you can make a truly informed decision. Until you're satisfied you have the info you need, I'd recommend holding off.