How an Annuity Can Protect You
By Julia Boorstin

(FORTUNE Magazine) – When it comes to retirement planning, few investment vehicles generate the confusion annuities do. The most basic annuity, known as an immediate fixed lifetime annuity, works like this: You pay an insurer a lump sum--usually upon retiring--in exchange for regular payments until you die. (These aren't to be confused with variable annuities, which give you payouts that depend on market returns, or deferred annuities, savings vehicles that begin paying out years after an initial deposit.) Here's an example: In exchange for a $500,000 lump-sum deposit into Vanguard's "lifetime income annuity," a 65-year-old man would collect $3,221 a month for life. (The monthly payout for a 65-year-old woman would be slightly lower; if you choose an annuity that continues for your surviving spouse, the payments are lower still.)

Many annuities offer a dizzying array of options, from inflation-adjusted payouts to complicated withdrawal provisions. And as baby- boomers near retirement, brokerage houses, insurance companies, and mutual funds are marketing products with confusing new bells, whistles, and names so clever--quality-of-life insurance, longevity insurance--that you'd think you were buying the guarantee of happy sunset years rather than a simple stream of income. Indeed, many financial pros have long been wary of annuities because they're often so complicated it can be almost impossible to figure out whether they're a good deal. What's more, with an annuity you typically lock yourself into a prescribed return, you forgo easy access to your money, and your heirs often receive nothing when you die.

And yet with the disappearance of traditional pensions and questions about Social Security, annuities' guarantee of lifetime income is looking more appealing, even to the pros. If you decide an annuity is the way to go, invest just a portion of your retirement savings--say, 25% to 50%; keep the rest in standard vehicles like stocks and mutual funds. More tips:

• Stick to a basic immediate fixed lifetime annuity. The more add-on features, the higher the expenses tend to be.

•Choose an annuity provider rated AA-- or better by Standard & Poor's or Aa3 by Moody's, according to retirement expert Steve Vernon, author of Live Long and Prosper.

•Steer clear of insurance brokers, who charge a commission that may be as high as 4% of your investment. Instead buy directly from commission-free providers such as Fidelity, T. Rowe Price, and Vanguard.

•Find an annuity with the most generous payout. Comparison shop at or Note that comparing fees alone isn't useful, because a company may charge a high fee but assume a shorter life expectancy, meaning your payout will be higher. And it's the payout that counts. -- J.B.