Monday, Sep. 27, 2010

Annuities That Take the Sting out of Stocks

Nobody who suffered through the stock market's downturn in 2008-09 has an idyllic notion about the role stocks will play in retirement. Yes, they should deliver growth, but some hair-raising frights as well — the proverbial Black Swan. But there is a way to ride the stock market's progress through the years while limiting potential losses. A safety-net feature is contained in some annuity contracts with a so-called guaranteed-minimum-withdrawal benefit. As with many annuity perks, this privilege doesn't come cheaply, but you can find reasonable prices by shopping around. Just don't shop too long. "Ever since the big stock markets' drop, companies have been raising the price of this benefit," says Steve Norwitz, a spokesman at T. Rowe Price.

Annuity contracts come in two types: the fixed annuity that guarantees a preset payout for life, and the variable annuity in which the payout depends on how well your investments perform. In the variable variety, the guaranteed-minimum-benefit feature typically ensures that your monthly payment won't go below an initial amount, even if your investments perform poorly. What's more, your portfolio value — and your monthly payment — can rise if your investments do well. Most insurers that offer this kind of product — the big three are Prudential, MetLife and Jackson National — put restrictions on the types of investments you can make. That seems reasonable enough: nobody wants to insure a gunslinger. But be careful to focus on the fees and surrender charges (i.e., the penalties you'll pay for cashing out in the first few years) when comparing products, since that's where insurers can slip in unfavorable terms. Finally, it's important to remember that annuity payouts, even if they are derived from stock-market gains, are taxed as income, so it's best to consult with an adviser before plunging in.