Annuities provide peace of mind.

For more than half of aging Americans, there is at least one thing scarier than death. A recent Allianz study found that 60 percent of baby boomers are more fearful of running out of money in retirement than dying. For these Americans, adding a guaranteed source of income during retirement by purchasing an annuity is one easy way to gain peace of mind. However, there are many different types of annuities, and their structures are often relatively complex. Here are seven things every retirement planner needs to know before investing in a lifetime annuity.

There are different types of annuities.

Not all annuities are equal, so investors who want guaranteed income for life starting today should make sure to choose an immediate lifetime annuity. Immediate annuities allow investors to make a lump sum payment up front in exchange for immediate and regular (typically monthly) income until death or until a specified date in the future. Other types of annuities, including variable annuities and fixed-index annuities, add a variable rate of return into the equation for investors looking to boost returns based on stock market performance. However, the typical immediate annuity has a fixed rate and payment schedule.

It's easy to estimate monthly payments.

For investors curious about how much monthly income they could generate from an immediate annuity, there are plenty of online calculators out there that will provide estimates in just a few seconds. For example, the calculator provided by ImmediateAnnuities.com estimates that a 65-year-old man living in Florida with $200,000 to invest in an immediate annuity could expect between $985 and $1,085 per month in annuity income. Monthly annuity income varies based on principal invested, age, gender and current interest rate. Investors can also boost their monthly income by opting to defer their first month's income as long as possible.

Annuity payments can be passed on to beneficiaries.

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Investors who opt for an annuity with a cash refund clause can have any of their remaining principal paid out to a beneficiary in the event of an early death. Annuities with cash refund guarantees typically come with lower monthly guaranteed payments, but they provide an extra bit of insurance against the possibility of an untimely death. The typical 65-year-old annuity investor is anticipating at least a decade worth of retirement. But annuities with cash refunds guarantee that the investor's principal is not simply lost in the event that he or she dies at age 67.

Annuity payments can be immune to market swings.

Standard fixed-rate annuities have no exposure to volatile short-term swings in the stock market. It's OK for 401(k) accounts to generate negative annual returns while an investor is employed and has a regular paycheck in the mail. However, counting on capital gains from mutual funds or other investments to put food on the table in retirement is a recipe for disaster. Fixed-rate annuities deliver the same monthly income through thick and thin in the economy and in the stock market, eliminating a major potential source of financial risk for retirees.

Annuities are a safety net for aggressive retirement investing.

For retired investors who want to speculate in higher-yielding stocks, bonds or other assets, a fixed-rate annuity can serve as a safety net in the event other investments go south. The U.S. stock market has historically produced annual returns of around 10 percent, much higher than the typical rate of return for fixed income assets. However, the stock market can also be very risky in the short term. By investing in a fixed-rate annuity, Americans can lock in a guaranteed income for life and chase higher returns with the remainder of their retirement savings.

Annuity principal is difficult and costly to access.

One of the few cons to annuities is that the up-front principal that the investor turns over may be costly and difficult to get back prematurely. Investors who think there is any chance they will need access to a bulk of their principal at any point in the future may want to reconsider investing in an annuity. Some annuities allow certain investors to access future income payments early, and other annuities allow investors to access principal if they fork over an extremely high early withdrawal fee. Those fees can be as high as 20 percent of the amount withdrawn.

Annuities are not FDIC insured.

Most annuities offer better interest rates than savings accounts or certificates of deposit. However, those higher returns come at a cost. Much like mutual funds and other investment products, annuities are not included among the "traditional" bank accounts that are insured by the government's Federal Deposit Insurance Corp. In other words, while annuity payments may be contractually guaranteed for life, that guarantee is only as good as the insurance company or other institution backing it. In the event of a company bankruptcy or other solvency issues, annuity holders may lose some or all of their investment principal.





Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.