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Annuities keep gold in the golden years

Like all of us, people in their twilight years are worried about the future. But when it comes to managing their savings, they have little or no margin for error.

One such person is an 80-year-old woman whose income is tied to the interest she can earn on such repositories as certificates of deposit.

The other is a psychiatrist who's still working at 70 because he has no pension and the value of his stock portfolio has plummeted.

The 80-year-old's son, worried about how his mother can continue to make ends meet with interest rates at record lows, pondered an offer that guaranteed her an attractive return on her money for the rest of her life in return for a single lump sum payment.

The psychiatrist was intrigued by a similar offer.

Each was mulling over an investment known as a single premium immediate annuity, or SPIA.

You turn over a lump sum of cash to an insurance company, and in return you start receiving a fixed monthly payment right away. The payments continue as long as you live, even if you live to 110.

These investments are ideal for people who worry about outliving their assets, can't deal with the volatility of the stock market and don't want to have to make any investment decisions. Because of their guarantee of lifetime income, they can act as a substitute for traditional pensions, which are going the way of the Model T Ford.

Favorable tax treatment of the monthly annuity checks is another advantage of these investments, says Joe Rosenswank, editor of Comparative Annuity Reports in Fair Oaks, Calif.

'Part of the monthly income you receive from a SPIA is considered a return of principal and is thus excludable from income taxes,' he says.

How much you get for the money you turn over to the insurance company depends upon your age and sex and prevailing interest rates at the time you make the purchase. For example, a 65-year-old woman who invested $100,000 would get $630 a month for life, based on the average quotes provided by more than a dozen major life insurance companies. A 65-year-old man who invested the same amount would get $669 for life (slightly more than the woman because of his shorter life expectancy).

But with interest rates at historic lows, isn't this the classic wrong time to buy an immediate annuity?

'No,' says Eric Sondergeld, corporate vice president of retirement research for Limra, a financial services research organization in Windsor, Conn. 'The best time to buy is when you need it.'

He notes that the average age of purchase is about 70. Coincidentally, this is about the time when people must begin taking distributions from their individual retirement accounts; withdrawing some money from an IRA and investing it in a SPIA counts as a distribution. Sondergeld says it also is a time when people have had several years of experience managing their retirement finances and may be ready to turn over the job of managing their assets to an insurer.

It is the promise that you won't run the risk of outliving your assets that appeals to many shell-shocked victims of the bear market. The guarantee of an immediate annuity is especially comforting to those who had the bad luck to retire just when stocks headed south.

So it's no surprise that sales of fixed annuities have soared in recent years, while those of variable annuities linked to the stock market have slumped. Sales of fixed SPIAs were $5 billion last year, and have more than doubled since 1999, according to Limra.

Despite their appeal as a safe haven, you should never put all your money into an immediate annuity, partly because you want to have some liquid assets available for an emergency and partly because they may not be indexed to inflation (unless you pay extra). One rule of thumb is to put no more than 30 percent to 35 percent of your assets in these investments.

A unique attribute of SPIAs is that they are an investment where procrastination can pay off. The reason is that the longer you delay, the shorter your life expectancy. This means that you will get a greater payout than if you had purchased the annuity at a younger age.

Sondergeld says there are two major factors to concentrate on when looking for an annuity. The first is the financial health of the insurance company you are buying the annuity from.

'You want to be sure it will be around as long, if not longer, than you are,' he says.

You may wish to restrict your shopping to companies that qualify for the top 'superior' rating of A+ or A++ by the rating agencies, such as Best's Insurance Reports (available in many libraries).

The second thing to look for is the highest 'price' or monthly payout you will get for your money, which can vary significantly from company to company. Even though the difference may seem small at the beginning, it can amount to tens of thousands of dollars more income in your pocket over the decades.

For example, a survey by Comparative Annuity Reports found that a top-paying company would pay a 75-year-old woman $840 a month for a $100,000 investment, $102 a month more than from one of the lowest-paying companies. If the woman chose the latter, she would lose '$18,360 over her normal life expectancy,' Rosenswank says.

One way to begin your shopping is to call your insurance broker, financial planner or banker for quotes. Another approach is to visit various Web sites, though some may require a modest fee to research your individual needs. Helpful sites include www.webannuities.com, www.annuitycomparativedata.com and www.wiser.heinz.org.

An excellent booklet for both sexes is 'Making Your Money Last for a Lifetime: Why You Need to Know About Annuities,' available for $3 from the Women's Institute for a Secure Retirement, 1920 N St. N.W., Suite 300, Washington, D.C. 20036.

If you live in Oregon and are a teacher at the college, university or kindergarten through 12th-grade level, a good place to start your search is with TIAA-CREF (1-800-223-1200), the investment organization that serves educators. In Washington, the general public can buy TIAA-CREF annuities.

Deborah Rankin, an award-winning former personal finance columnist for The New York Times, is based in Portland. Contact her at This email address is being protected from spambots. You need JavaScript enabled to view it. .