Use annuities to protect your retirement?

It's important to read the fine print, but the fine print is often difficult to understand. Andy Hempeck of California-based Creekside Partners says investors should be aware of the commissions being paid to the broker or agent when you purchase the annuity, the total annual expenses charged by the annuity, recurring commissions or "trailers" paid to the brokerage firm or agent, surrender charges that will be applied if you change your mind about the investment, and who will manage the investment mix after you purchase the annuity.

"All of this information is available in the prospectus if you know what you are looking for and really dig, but most investors are charmed by the salesperson and do not spend time with the footnotes," Hempeck says.

Because of the extra fees associated with annuities and various riders, the price of the product "can ride up over the course of 30 to 40 years," says Gotham Financial Services' Ori Pagovich. This means annuities may not be an efficient savings or investment vehicle for younger investors. "When comparing it to other investments over such a long period of time, the difference can be significant."

In addition, annuities are illiquid and less flexible than other investments. Ted Snow, CFP, owner of Snow Financial Group in Addison, Texas, says many companies now have contracts that allow the investor to get out of a variable annuity without any surrender charges. However, sometimes the inability to surrender is psychological. "I have seen annuities that were sold with a step up in death benefit, and due to the market drop and the fees, the death benefits are so much higher than the actual value (of the annuity) that people don't feel they can take money out of these accounts," Montgomery says. "They wind up as a life insurance policy that they can only collect on when they die."

Advice for purchasing annuities

When looking at annuities, "be sure you are working with a financial professional who can offer all the major categories of annuities, including immediate, fixed, indexed and variable," says Ryan Pinney, brokerage director at Pinney Insurance Center in Roseville, Calif. "Many advisers are limited in the type of annuities they can offer. Choice and full disclosure of your options and risks are key."

Also pay attention to fees as well as an insurance carrier's ratings. An insurance policy is only as good as the company that backs it.

"Especially in this tough economic environment, you want to entrust your money to a carrier that has a strong balance sheet," Pagovich says. "And make sure fees are kept low. Add on riders that you will actually use; just because it sounds like a good idea doesn't always mean it is."

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