Annuities sure sound like a great retirement-savings deal: Unlike a 401(k), IRA or SEP, you can contribute as much as you wish; your investment grows on a tax-deferred basis; and you can rest easy knowing you’ll receive monthly payments for the duration of your contract.

But annuities may not be ideal if you already have assets saved that can produce enough income for you and your spouse during retirement.

Consider an immediate annuity if:

• You are near retirement age.

• You haven’t saved enough in your retirement plans to provide sufficient income.

• You need steady retirement income in addition to social security payments and your other investments.

• You worry about outliving your savings.

• You have no family to support you if your savings run out.

• You want your spouse to continue receiving steady income if you die first.

Consider a deferred annuity if:

• You are under age 40 . Investments in securities historically require 15 to 20 years to achieve a rate of return that exceeds low-risk investments.

• You are a likely target for litigation by former clients, creditors or a divorcing spouse. Doctors, lawyers and now even financial and real estate professionals are at risk. In most states, annuities cannot be attached in third-party claims against your assets.

• You want to swap out of a lousy annuity or poorly performing universal life insurance policy. Through what’s known as a “1035 exchange,” the IRS allows you to transfer the cash value of one insurance product to another without triggering taxes. The cash will still have a chance to grow tax-deferred, and the losses you suffered in the insurance policy can be used to offset the annuity's gains for tax purposes upon withdrawal.

Before you invest in any type of annuity, consider the drawbacks:

• Fees charged by insurance companies on can be relatively high, boosting the odds of reduced returns on annuity funds over time.

• Calculations used by insurance companies to determine rates of returns on some investments can be complex and suppress long-term earnings.

• Returns on an annuity investment over time might have been higher if assets had been invested in non-annuity mutual funds.

• Cashing in an annuity to withdraw your invested assets can be costly in terms of surrender charges.

• Rules of some annuities can cause part or all of your investment to be forfeited if you die.

• Sales pitches may sound good, but they still need to be carefully evaluated. For example, many insurance companies encourage you to roll your IRA into an annuity. But annual annuity fees can range as high as 3%, which is much higher than other long-term investment vehicles like mutual funds in an IRA or 401k, and your rate of return could be lower than expected.

• Inflation can undercut the value of a fixed monthly payment for life, especially after income taxes are paid.

Want to Know More?

• Whats an Annuity?
• Choosing an Annuity
• Grilling Guide: Questions to Ask Your Insurance Company