Ups and downs, ins and outs of buying annuities as part of your retirement plans

Annuities are (a) a great way to make your money last as long as you do; (b) fee-laden, lousy investments pushed by greedy commission-hoarding salesmen; (c) so complicated they make your head hurt.

The correct answer, of course, is (d), all of the above. But I'm risking Excedrin headache number 65 to review some of the newer developments in the annuities market, because some of them are getting better. And because we're not getting any younger.

First, a crash course: Annuities are savings vehicles that are also insurance products. As such, they come with tax advantages similar to those of 401(k) plans. Save your money via an annuity, and the income you earn in the plan is tax-deferred until you start pulling it out for retirement. Annuities also come with some insurance-like guarantees: If you die before you cash out your plan, your heirs generally get a pile of money that may be roughly equivalent to what you put in.

There are two basic ways to categorize annuities. First, they are divided by whether they are deferred (long-term savings vehicles that you buy when you are working in the expectation they will grow) or immediate (policies you buy upon retirement that start paying you monthly right away.)

The second way they are categorized is by how they grow. Fixed annuities declare an interest rate and that's what you earn. Variable annuities allow you to choose how the money you put in gets invested; you can choose mutual fund accounts that theoretically will allow you to earn more. Typically, deferred annuities are variable and immediate annuities are fixed, but they don't have to be.

Got that? The best thing about annuities has always been their ability to take some of the guesswork out of retirement. When a portion of your savings is stashed away in an account that promises to pay you monthly, even if you live to be 125, you can afford to be a little bit looser in the way that you invest and spend the rest of your money.

Now, insurance companies are sweetening their deals to attract baby-boom customers who may have been made wary of high fees and investment risks that often come with annuities. Living-benefits riders, which guarantee minimum returns to variable annuity holders, have become particularly popular, says Mike DeGeorge, general counsel for NAVA, the trade association representing the annuity industry. Last year, roughly 64 percent of annuity buyers were opting to pay extra for these guarantees.

That may not always be worthwhile. These living benefits typically add between 0.25 percent and 0.75 percent in annual fees to the annuity, and can go much higher. Investors who simply put their money into a diversified portfolio for 10 years are highly unlikely to emerge with less money than they started with, a typical deal promised by those living benefits.

DeGeorge suggests that those guarantees enable policyholders to take more risks with their investment portfolios, possibly affording them higher returns. But most issuers also limit just how risky you can get with your portfolio anyway.

The bottom line? The industry has shown some willingness to get creative and make better products, and for some retirees and future retirees they may meet a need. But it's still an industry best approached cautiously.

It's not a good idea to put all of your retirement savings into an annuity; you might need to get at it for an emergency. It's also not a good idea to do all of your annuity-buying at once; with products always improving and the interest rates on which fixed annuities are based going up, you might get better payouts if you stretch out your fixed annuity buying throughout your retirement.

And it's not a good idea to buy the first annuity you hear about from the first person who tries to sell you one. Make sure you understand the benefits, the built-in fees, the availability of investment choices, how much it would cost you in surrender charges if you wanted out, and how much the tax benefits are really worth to you. Then compare those policies with some of the direct sold policies that claim to be cheaper, such as those sold by Vanguard Investments, Charles Schwab, and Fidelity Investments.

Linda Stern is a freelance columnist. She can be reached at lindastern@aol.com.