insurance

How to Choose the Right Annuity for You

A new generation of annuities are simpler and cheaper.

A new generation of annuities from Vanguard Group and Fidelity Investments are simpler and cheaper than most deferred variable annuities, and you can buy both products directly without having to pay a commission to a broker. For younger retirees, these annuities may be a better choice than an immediate annuity -- even if the initial payout is a bit lower -- because you can benefit from future stock market increases rather than locking in a fixed payment for life based on today's low interest rates. Also, unlike an immediate annuity, with these plans you can reclaim your money if you change your mind, sometimes without a penalty.

If you don't expect to start tapping the income within five years, you may be better off choosing a product with higher expenses to get a withdrawal benefit that is guaranteed to grow over time. If you don't like the idea of paying high annual fees but you want to guarantee a stream of income in the future, consider a deferred fixed annuity that doesn't rely on market performance. It ties payouts to your age at time of purchase, amount invested and years before you begin withdrawals.

If you NEED the money within the next five years

Company: Vanguard

Product: Guaranteed Lifetime Withdrawal Benefit

Investment choices: Two balanced index funds (one 60% stocks, 40% bonds; one 40% stocks, 60% bonds) and one fund actively managed by Wellington

Total annual fees: 1.45% for balanced funds; 1.55% for Wellington

How it works: Payouts can increase if the value of your investment account rises. Say you invest $100,000 and you start withdrawals between ages 65 and 69. You would receive at least 5% of your initial investment -- $5,000 -- every year. But if your account balance rises to, say, $120,000, the payout would increase to $6,000 a year. If the balance later falls, you will still receive at least $6,000 per year for the rest of your life. Payouts are larger if you start withdrawals at older ages. There is no surrender charge, so you can withdraw your actual account value (not the guaranteed amount, which may be higher) at any time without penalty.

Company: Fidelity/MetLife

Product: Growth and Guaranteed Income

Investment choices: One actively managed Fidelity portfolio

Total annual fees: 2.6% for individuals; 2.75% for joint life

How it works: Bases your initial payout partly on the amount of your original investment and when you begin annual withdrawals: 4% for ages 59½ to 64; 5% for ages 65 to 75; 6% for ages 76 and older. Fidelity's actively managed portfolio of domestic and international stocks and bonds is designed to maximize returns. If the investment account balance rises, your payout permanently increases, even if the balance later declines. A surrender charge may apply if you cancel the contract or withdraw excess funds within the first five years.

If you DON'T NEED the money within the next five years

Company: Prudential

Product: Highest Daily Lifetime Income Benefit

Investment choices: 18 actively managed portfolios

Total annual fees: 3.5%

How it works: Resets your investment balance daily, locking in the highest balance of the year, and the balance compounds 5% each year until you start taking withdrawals. Say you invest $100,000 at age 60 and start taking withdrawals when you're 70. The minimum guaranteed base (assuming no market growth) would be $162,889 at age 70. You could withdraw at least 5% of that guaranteed amount -- $8,144 -- each year. Market growth during your accumulation phase would add to your guaranteed withdrawal amount. Surrender periods and charges vary, or you can pay a higher fee in order to get access to your funds at any time penalty-free.

Company: New York Life

Product: Guaranteed Future Income

Investment choices: None. Fixed payout based on purchase age and start date

Total annual fees: No annual fees; one-time fee of $325

How it works: Works like a personal pension: You invest a lump sum or make an initial investment of at least $10,000 and add to it over time if you choose. In return, you will receive a fixed payout amount for life, beginning as late as 40 years in the future. Say a 60-year-old man invests $100,000 and wants to receive payouts beginning at age 70. He would collect $12,072 per year for life, with each payout representing a return of a portion of his original investment, plus earnings and mortality credits. However, if he dies before the start date, he gets nothing (unless he opts for a return-of-premium rider, which would reduce his payout to $9,972 per year).

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