Buying an Annuity Should be Part of Your Retirement Strategy

Since 2010 individual retirement savers have bought more than $1 trillion in annuities, and 2015 set an all-time record for purchases of a particular type called a fixed indexed annuity, according to the LIMRA Secure Retirement Institute, an insurance industry group. To add to individuals' appetite for annuities, corporations are buying record amounts of annuities to offload the cost and risk of retiree pension benefits.

Annuities represent a huge and growing business -- $237 billion last year, LIMRA says -- for insurance companies, banks, brokerage firms and mutual fund companies. To the individual brokers and planners who sell them, they offer lucrative commissions of as much as 10%.

For individual savers, annuities provide significant tax-deferral and estate planning advantages, notes Steven Azoury, an investment advisor from Troy, Mich. But today, when markets are volatile, security is the big draw for annuity shoppers.

"I've been around 35 years, and I've never seen it where the first thing they ask for is guarantees," Azoury says. "They used to ask about growth. They're not asking for that any more. The first thing out of their mouth is: I want guarantees."

Annuities do offer retirement savers dependable regular payments for life, no matter what markets or interest rates do. However, the many varieties, confusing terms, complex paperwork and imperfect transparency about costs and fees make buying annuities challenging and uncomfortable for some.

To begin with, unlike stocks and mutual funds with readily available price listings, almost the only way to get a feel for what annuities cost is to talk with a few sellers and get some quotes. "You have to shop around," says Ted Beck, president and CEO of the National Endowment for Financial Education, a financial literacy non-profit in Denver. "There isn't any easy way to look up a price and do a comparison."

It's important to compare quotes on similar annuities, since price can vary widely depending on features, he adds. The two main types are immediate and deferred. A buyer of an immediate annuity will start receiving monthly checks immediately. A deferred annuity starts making payments at some future point, such as the planned retirement date.

There are also sub-types. Fixed annuities pay a minimum interest rate. Variable annuities offer a payout that will fluctuate depending the rate of return on the investments, usually mutual funds. Indexed annuities, the fastest-growing type today, provide a return based on an index such as the S&P 500.

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