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We live in a society that wants to stay young forever, so it's no surprise that annuities are a part of retirement planning.

With an annuity, you invest a set amount of money and then get a monthly payment for the rest of your life. So if you're looking to stay young and live forever, a dependable income stream could rank right up there with Botox and the push-up bra.

The problem is that while annuities offer tax-deferred growth on your investment, there are so many hidden fees that actually outweigh the tax efficiency. There are tons of setup and administrative fees as well as steep surrender charges if you need the money before your retirement; annuities sold by insurance companies often carry extremely high fees, so tread carefully.

But if you've put as much money as you can into your 401(k), Roth IRA or traditional IRA, then an annuity could be a great way to continue your tax-deferred savings if you truly understand these products.

So What is An Annuity?

Here's how it works: You give the company from which you're purchasing the annuity a chunk of money, a.k.a. your premium, either in a lump sum or over a period of years. After your premium is paid in full, the company will make regular payments to you either over your lifetime or a shorter,specified amount of time if you prefer.

In many ways, annuities are similar to nondeductible IRAs, says Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research. In both cases, you contribute after-tax dollars and the earnings grow tax-deferred until you

start withdrawing at age 59-and-a-half. At that time, you'll owe ordinary income tax on the earnings. Both will hit you with a penalty if you withdraw the money before age 59-and-a-half.

The upside to an annuity, though, is that there aren't any contribution limits. With a nondeductible IRA, your 2005 contributions are limited to $4,000 a year, with an additional $500 allowed for folks age 50 and above. With an annuity, there are no limits. You can put in as muchas you want each year. And you are not forced to start withdrawing from your annuity at age 70-and-a-half, as with an IRA. You can leave the money in your annuity as long as you like.

Sounds good so far, right? Don't get too excited, the catch is coming.

The High Cost of Living

OK, here's the catch.

Annuities are expensive, laden with a ton of fees. There are big upfront sales charges and back-end surrender charges, which linger around 7% if you withdraw the money too soon. In addition, there's mortality and expense charges to cover the risk the insurance company takes onto pay you lifetime income. And don't forget the administrative and annual records maintenance fees.

So all those fees could defeat the whole point of the tax deferral on your earnings. That's because the industry's average expense ratio hovers around 2.35%, according to Morningstar. Some plans could hit 3.5%. The average mutual fund, on the other hand, charges just 1.44%.

And remember, you owe ordinary income tax on your annuity withdrawals, which could be as high as 35%. If, instead, you had your money in mutual funds, you'd only owe the 15% capital gains tax on the earnings.

"People get overly focused on paying taxes vs. generating the highest after-tax return," says Robert Nestor, Principal in Vanguard's Retirement Resource Center, who says they talk people out of using annuities every day for just that reason.

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For example, Vanguard's basic annuity will run you around 0.67%. So on a $100,000 investment, you'd pay $670 per year -- a $1,680 savings vs. the $2,350 annual cost of the average annuity, notes Nestor. Schwab's expense ratio hovers around 0.95%.

But aside from the high fees, the reason these things get such a bad rap is because they're often sold to the elderly who are enthused by the notion of a constant payment stream. But unfortunately, many don't fully understand the fee structure and get burned if they need to withdraw the money from the account too soon.

"So while the ability to let your money grow tax-deferred is appealing, there are long-term concerns about the fees and expenses and level of tax inefficiency," says Bill Fleming, directorof personal financial services at PricewaterhouseCoopers in Hartford, Conn.

And one more bummer. A variable annuity is "the worst thing for your heirs to inherit because there's no step-up in basis," says Nestor. That means, for tax purposes, your heirs will owe ordinary income tax on the account's value from the day you opened the annuity. So if you bought afund for $100 and it's worth $1,000 at your death, they'll owe tax on the growth, or the $900. With a regular mutual fund, your heirs will get the "step-up in basis" and won't owe a dime. Instead, they'll have a $1,000 investment in their portfolio.

So Don't Get Taken

Put on your investigative hat on and dig through the fine print. This stuff is hard to crack (heck, it was hard for me to get people to admit to the fees). Talk with a trustworthyfinancial advisor who is not commission-based. And try not to buy an annuity from an insurance company (I'm certain to get emails about this) because their fees are often outrageous. In addition, those guys work on commission and they could make upward of 5% on the sale of a variable annuity. So it's no surprise they push them.

Granted, if you're going to stay young forever you'll need your money to stick around too. But make sure you're spending it on personal training sessions and anti-aging vitamins.

Not those ridiculous annuity fees.