There are tradeoffs with any annuity. An immediate-fixed annuity offers comfort but no real inflation protection. An immediate-variable and deferred annuity comes with market risk. And in both cases, steep fees and sub-par performance also are risks.

If an annuity makes sense for your needs, here’s what you need to consider when narrowing your choice:

• Calculate the payout. How much monthly income are you likely to receive based on the sum you plan to invest? You can find a good calculator here.

• Check the strength. Buy annuities only from financially strong insurance companies. Check their ratings at A.M. Best or Fitch Ratings.

• Verify returns. Look carefully at how an annuity’s investment returns are calculated. The returns on funds offered by insurance companies tend to be lower than equivalent open-end mutual funds due to higher fees and expenses.

• Add up the expenses. Find out exactly what you’ll be charged in expenses, commissions and fees. Stick with variable annuities that charge no more than 2%.

• Explore the death benefit. What will your spouse receive if you die before deferred-annuity payments are due to begin? Consider an extra fee to boost the annuity’s death benefit.

• Size up surrender fees. What will you be charged if you choose to cancel the annuity and withdraw your savings? Some annuities charge a penalty of 6% or 7% in the first seven years. In addition, your gains will be taxed as income, and you’ll face a 10% penalty if you’re under age 59 ½ at the time of withdrawal.

• Consider low-fee annuities. Variable annuities offered by major mutual fund companies like Vanguard, Fidelity and T. Rowe Price tend to charge lower fees—around 2%.

Want to Know More?

• Whats an Annuity?
• Do You Need an Annuity?
• Grilling Guide: Questions to Ask Your Insurance Company