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Annuities Entice Risk-Averse Investors

Annuities offer guaranteed returns, a boon for investors wary of stocks.

NEW YORK (TheStreet) -- Annuities are expensive and complicated, but some are worth considering. Among the most appealing are investments that provide guaranteed annual payments.

Say you want to receive $20,000 a year for the rest of your life. By buying an annuity, you can be assured of receiving the income. At a time of volatile markets, the guarantees can provide the security that cautious investors crave.

"We tell our clients to put at least 25% of their retirement money in annuities with guarantees," says Oliver Pursche, executive vice president of Gary Goldberg Financial Services, an investment advisor. "Clients who bought annuities three or four years ago are very pleased with the results."

To get a guarantee, you must typically buy a variable annuity from a life insurer and select the lifetime income option. Variable annuities resemble mutual funds, but mutual funds are not permitted to offer guarantees. Only insurance companies can promise to pay lifetime income. Guaranteed products are sold by many insurance companies, including


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Investors in the annuities can select from a variety of stock and bond investments. Some of the choices are run by top mutual fund managers. For his bond holdings, Pursche often buys accounts run by Bill Gross, manager of the top-performing

Pimco Total Return

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mutual fund. For stock positions, Pursche takes accounts run by Tom Marsico, who manages

Marsico Focus

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, a large-growth mutual fund.

To appreciate how the guaranteed products work, consider a 62-year-old who invests $100,000 into a mix of stock and bond annuity accounts. Say the assets grow to $250,000 by the time the saver reaches 72 and begins taking payouts. The retiree would receive 6% of assets or at least $15,000 each year for the rest of his life.

What happens if markets are miserable for a decade, and the asset value stays at $100,000? The retiree would still receive at least $12,000 a year because of the minimum guarantees. The payments would increase each year, ensuring that the income keeps pace with inflation.

Make no mistake, the guarantees are not cheap. The typical annuity comes with annual expenses that range from 2% to 3.5%. In contrast, many top mutual funds charge less than 1%. Because of their lower costs, mutual funds may outperform annuities during bull markets. "The annuities are expensive insurance products," says Norbert Mindel, author of

Wealth Management in the New Economy

(Wiley, John & Sons, 2010). "People pay the price because they want to be sure that they don't exhaust their assets."

For most of his clients, Mindel recommends low-cost index funds instead of annuities. But there are cases when annuities seem to be the safer choice. Say a client has $3 million in stock and bond mutual funds. He needs to withdraw 6%, or $180,000, a year to cover living expenses. In that scenario, the client has a problem because retirees should only withdraw up to 4.5% of assets annually, Mindel says. If the client withdraws 6%, he runs the risk of exhausting his assets in 15 years. To protect against going bankrupt, Mindel suggests putting part of the assets into an annuity that guarantees 6% payouts.

Suppose you buy an annuity, and you change your mind in a few years. Under typical terms, you can withdraw the money, though you might be required to pay redemption fees. If you are willing to give up the right to make withdrawals, then you may prefer an immediate annuity. These provide lifetime income, but they do not permit withdrawals of principal. In the first year, immediate annuities typically pay out 30% more than an annuity that permits withdrawals.

One problem with immediate annuities is that the payment is fixed, so there is no inflation protection. To allow some growth along with income, Hartford recently introduced its Personal Retirement Manager. Using the product, a Hartford client with $100,000 might invest half in a fixed investment that resembles an immediate annuity. That provides fixed income for life. The other half goes into funds that will rise and fall along with stock and bond markets. Investment options include a portfolio that resembles the top-performing

Hartford Growth Opportunities Fund

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If the stocks soar, the investor has several options. He can withdraw some money and spend it. Or he can take the proceeds and invest in the lifetime income account. By investing regularly in the lifetime annuity, savers can be sure that they will be able to afford a comfortable retirement.

Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.