Immediate annuities: Do-it-yourself pensions

An annuity that ends with your death may adversely affect your heirs. In fact, some financial planners won't recommend immediate annuities due to fear of lawsuits initiated by heirs.

Another downside of immediate annuities is that once the money is turned over, there's usually no turning back. Should you need a large sum due to illness or another emergency, you may be out of money and luck. "Once you've done it, you've lost access to the principal," says David Berman, a Certified Financial Planner with Berman McAleer based in the Baltimore area.

In addition, you won't have control over the sum you put into an annuity, and the guaranteed income that you receive from your immediate annuity may be less than what you might earn from another investment.

Of course, it's all relative. When the stock market was continually rising in the roaring '90s, immediate annuities looked like a poor bet. But when the Internet bubble burst and many retirees were forced to scale back (or even go back to work) because they lost huge sums in the ensuing bear market, immediate annuities started looking more attractive.

Financial planners emphasize that annuities should be just one item in your retirement toolbox that works well when properly used.

"It's a financial tool to manage risk," Kitces says. "If it's the tool you need, it's a great thing. If it's inappropriate, it's a terrible thing to use."

Annuity advantages

Annuities are good for retirees who are worried about their retirement savings running out and who are willing to forgo a higher return from riskier investments in exchange for a stable income. They're also suitable for healthy retirees who stand a good chance of living longer than folks of the same age group, but they're not suitable for the frail. Consumers who buy them are betting they'll live longer than actuarial projections.

When appraising immediate annuities, "You have to be honest about your own longevity," Lange says. "If I have a male client sitting here who is 30 pounds overweight and has a history of heart disease, I would tell him that he isn't a good candidate for an immediate annuity."


Annuity strategies

Most financial experts recommend that you don't sink all your retirement funds into an immediate annuity.

Because it is guaranteed -- you get the same amount each month regardless of how the stock market is performing -- investors get less of a "return" than if they would put money in high-yielding, riskier investments such as individual securities or stock funds. In the spectrum of investments, annuities are more conservative than equities but offer a better return than a bank certificate of deposit or government bonds. In any event, it's always a good idea to diversify among investments.

As a general rule, Lange, a CPA and tax attorney based in Pittsburgh, recommends allocating about 25 percent of your retirement funds into an annuity, but he warns that an individual should take his own personal situation into account.

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