Typically include tax-deferred growth of earnings.
Could include a death benefit that would pay a beneficiary a guaranteed minimum amount.
Fixed annuities guarantee a minimum rate of interest while the account is growing and periodic payments when the distribution phase begins. The distribution phase could last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.
Variable annuities include investment options, typically mutual funds. The rate of return and amount of payments received vary depending on performance of investment options selected.
Equity-indexed annuities base returns on changes in a stock index, such as the S&P 500, with a guaranteed minimum return.
Source: The Securities and Exchange Commission
In the wake of a slide that erased half the value of the U.S. stock market, legislation has been introduced in Congress to make annuities and similar retirement plans offering guaranteed lifetime payments more attractive.
But even before introduction of the proposal in the House of Representatives, investors burned by the stock market collapse were warming to annuities as a source of guaranteed retirement income.
The House measure would provide a tax advantage on payments from annuities, investment retirement accounts and other retirement plans that offer lifetime, guaranteed income. Defined-benefit company pensions, which also provide lifetime payments, would be excluded.
The tax advantage would vary depending on an individual's tax situation and details of the retirement plan. For example, 50 percent of otherwise taxable portions of annual payments from lifetime annuity plans — up to $10,000 — funded through after-tax dollars could be exempt from income taxes. Twenty-five percent, or up to $5,000 for an individual and $10,000 for couples, could be exempt from plans funded with pre-tax dollars.
The stock market's decline during the last six months of 2008 dramatically worsened the retirement outlook for many middle-class Americans, said Bill Waldie of Americans for Secure Retirement, citing a study the group released this month.
Nearly half the country's households own at least some stock, and many workers' retirement savings are invested in 401(k) accounts or other accounts dependent on the stock market.
The report highlights the importance of a guaranteed stream of income in addition to stock market investments and Social Security, Waldie said.
For the study, Ernst & Young LLP re-examined the finances of six typical middle-income households approaching retirement that it first looked at last year. The group's retirement assets decreased by 14 percent to 17 percent in the last six months of 2008.
A stream of guaranteed income helped, the study found. For example, a recently retired married couple earning $75,000 a year with a defined-benefit pension had a 57 percent chance of having enough money in retirement, Waldie said.
The same couple without a guaranteed source of stable income had only a 6 percent chance of financial success, he said.
Waldie said his group, a Washington-based coalition representing small-business owners, farmers, women, minorities and the life insurance industry, backs the proposal in Congress to give tax advantages to financial vehicles designed to provide lifetime benefits.
Social Security benefits help, but they aren't enough, Waldie said.
Experts estimate that Social Security replaces about 40 percent of people's income during retirement. Meanwhile, people need about 70 percent of pre-retirement earnings to live comfortably.
Even without a potential boost from Congress, people had begun to reconsider annuities as part of their retirement planning.
According to information gathered by Illinois-based Beacon Research Publications, sales of immediate fixed annuities — those offering a lifetime income stream unaffected by the stock market — hit $2.4 billion in 2008, a 30 percent increase over 2007.
Annuities can be structured in various ways. For example, a 65-year-old could invest $100,000 in an immediate fixed annuity to receive about $8,390 a year for life. If the same man wanted to guarantee that his beneficiaries would receive payments even if he died within 10 years of purchasing the annuity, he would receive about $7,980 a year.
Some experts recommend puchasing an annuity while also investing in stocks, which carry higher risks but the possibility of higher returns.
Annuities, which are offered by life insurance companies, have drawn criticism over the years for high fees and complex rules. Jeff Sharp, a wealth strategist at SilverStone Group in Omaha, said people seeking this kind of investment should shop carefully.
Investors generally should be within 10 years of retirement, he said, and they should expect to pay more for an annuity's guarantees because of the stock market decline.
The financial stability of the insurance company also is a consideration, Sharp said. Some insurance companies suffered losses because of the poor performance of their own stock market investments and have sought government bailout funds. Hartford Financial Services Group said this month that it would accept as much as $3.4 billion in aid.
People can check the financial health of insurance companies through ratings agencies A.M. Best, Fitch, Moody's and Standard & Poor's.
However, some of those agencies have been faulted for not seeing the dangers of financial instruments like credit default swaps that led to the financial meltdown, Sharp said.
“We have learned they do not necessarily have a good early opinion,” Sharp said.
Waldie at Americans for Secure Retirement offered reassurance: Insurance companies are regulated by the states, which require that money be available to back policies, and the companies contribute to state guaranty funds that help pay policy owners if a company fails.
Sean Lynch, senior wealth management director at Wells Fargo Private Bank, said people have to weigh having their money tied up in an annuity and the fees involved against more security.
“It does offer some downside protection,” Lynch said.
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