This guide will help you break down the complexities of variable annuities. By Kimberly Lankford, Contributing Editor March 29, 2012 EDITOR'S NOTE: This article was originally published in the February 2012 issue of Kiplinger's Retirement Report. To subscribe, click here.Variable annuities with guarantees are among the most complex financial products on the market. For one thing, each annuity uses its own method to determine payouts. Investment options vary from product to product. Plus, a myriad of obscure fees can easily eat away at the value of your investment. SEE ALSO: Special Report on Understanding Annuities All this makes it difficult for an investor to compare one annuity to another. "There are so many moving parts," says James Rogers, a financial planner with Keystone Financial Group, in Exton, Pa. Advertisement For most variable annuities with guarantees, you invest a lump sum in mutual-fund-like accounts within the annuity, and the value of the annuity can grow with the investments. Even if the investments lose value, you're still guaranteed a minimum lifetime payout once you start tapping the account. These products are best for people who plan to retire within a few years but worry that their retirement nest egg will lose value right before they start taking withdrawals. With all of the mind-boggling features in the typical annuity, it's easy to forget to answer the bottom-line question when comparing products: What is the minimum amount of income you'll get every year after you start to take withdrawals? "The focus should be on the actual dollar amount that will be paid," says Matthew Jarvis, a financial planner in Seattle. This won't be a simple task: An annuity prospectus can run 75 pages or longer. It's best to get advice from an adviser who specializes in these types of products. The first feature to study is the guarantee. Some annuities base the guaranteed payout on your original investment and can boost payouts if your funds perform well. Others increase the guarantee by a certain amount every year until you start taking withdrawals, no matter what happens in the market. Advertisement Typical of the first group is the Fidelity/MetLife Growth and Guaranteed Income Annuity. If you invest $100,000 and start taking withdrawals at 65, you're guaranteed to receive at least 5% of that original investment ($5,000 per year) for life, even if the funds lose value. If the investments perform well, your guaranteed payout can increase. If your account value rises to $120,000, you'll lock in a new payout of $6,000. Meanwhile, Prudential's Highest Daily Lifetime Income annuity bases your lifetime income on the highest daily investment value plus 5% compounded per year until you start taking withdrawals. Say you invested $100,000 at age 60. By 70, the minimum guaranteed base would be $162,889 (assuming no market growth). If you start tapping the account between 65 and 79, you'd get a 5% annual guarantee -- or $8,144. It's also essential to understand the difference between your guarantee and the actual return on your investments. An annuity that offers a benefit based on an annual 6% "deferral credit" (or growth) in the guaranteed base is not the same as a 6% investment return. With these annuities, you actually have two accounts to follow: the value of your investments and the value of your guaranteed base. Say you invest $100,000 and your investment increases in value to $120,000. At the same time, a 6% annual deferral benefit gives you a guaranteed base of $134,000. Your annual payout will be calculated on 5% of the $134,000 ($6,700). But if you cash out the annuity, you'll only get the $120,000 -- which could be reduced further by a surrender charge if you cash out within the first few years. Advertisement The percentage you can withdraw is often larger if you wait until you are older to start withdrawals -- perhaps 4% in your early sixties and 6% in your seventies. But it's best to start withdrawing in your mid to late sixties. If you're younger, you may be able to do better than the typical 4% withdrawal rate for that age, and investors older than 70 generally will get bigger payouts with an immediate annuity. The calculations can be different for married couples. Some base the payout rate on the age of the youngest spouse, while others lower the payout for all joint accounts. You may want to wait before taking withdrawals if you're near a cutoff for higher payouts. It's important to translate all guarantee percentages to dollars when figuring out your actual income, says Jarvis. One annuity may have a high deferral credit but a low payout rate, while another product may offer the opposite features. In comparing annuities, Jarvis recommends assuming that your investments will not grow over time; then figure out the minimum income you can get from each product. How Much Will You Pay in Fees? Advertisement Variable annuities with guarantees typically have three key annual fees. They all reduce the value of the account or the return on your investment. Check the prospectus carefully for all of the fees. The mortality and expense (M&E) fee pays for the insurer's costs. The fee is typically about 1.5% or more. The second fee is for the guarantee. Some annuities offer it as a rider that you can add separately while others build it into the M&E cost. The guarantee fee can run from 0.95% to more than 1.75% a year. You'll also pay a management fee for each mutual fund. As with all mutual funds, fees will reduce returns. While Fidelity and Vanguard annuities offer funds with low "expense ratios" of about 0.50% to 0.70%, some annuities offer funds with fees of 1.5% or more. It's important to consider the funds' performance as well as their expense ratios. Add up all the fees. An annuity can have a low fee for the guarantee but a high M&E fee. You'll pay more for extra features, such as a stepped-up death benefit. Also find out whether the fees for the guarantee and M&E are calculated on the guaranteed base; those fees could end up being higher than if they are calculated on the actual investment, says Mark Cortazzo, a certified financial planner in Parsippany, N.J. "If I put in $100,000 and the actual account is down to $50,000, my 1% fee is actually 2% of the amount I can withdraw," he says. Fees can have a big impact on payouts. Say you invest $100,000 and your annual fees for the guarantee and M&E are 3.5% of the investment value. The fees could reduce the investment value by about $30,000 over ten years, or even more if the value increases. That lowers the amount of money you can withdraw as a lump sum. And the fees also can affect your guaranteed income. Many annuities increase the guaranteed base by 5% a year or by the actual investment value, whichever is higher. Even if the fees don't affect the 5% deferral credit, they will make it tougher for the investment value to beat out the deferral credit. For more information, read Variable Annuities Without the Guesswork.