How To Choose An Annuity

If carefully constructed, an annuity can be an important part of your retirement plan–but they're not right for everyone

Pathologist Arthur Bracey works in an environment of rising malpractice judgments. But he’s no longer worried that an angry patient filing suit against him could take part of his near $200,000 yearly salary.

Why the peace of mind?

In June 2002, Bracey, 52, purchased The Best of America variable annuity from Nationwide Insurance Co. in Columbus, Ohio. Like many doctors, Bracey realized that just one lawsuit could radically alter his life, so he chose a variable annuity to protect his income.

With this particular annuity, Bracey can contribute an unlimited amount of money each year and still have the annuity legally protected against lawsuits that may be filed against him personally or professionally. Such protection allows his wife, Annette, 47, to stay home and care for their two children, after working more than 17 years in the public health industry.

In addition to legal protection, the annuity gives Bracey control over where his money is invested and how the assets are divided. He also enjoys lower federal income taxes, which is a huge plus since Bracey’s earnings put him in the 35% tax bracket.

“This offers great security,” says Bracey, who practices medicine at St. Luke’s Episcopal Hospital in Houston. “This is how high-profile people protect assets.”

Bracey is using an annuity to protect his income, but each year, many Americans purchase them because they address multiple financial goals. According to the Insurance Information Institute, an insurance industry agency that monitors sales, investors put $223.1 billion into annuities in 2002. These investors included those still scaling the ladder of success and those on the brink of retirement. But while banks and other financial institutions encourage a younger generation to buy annuities, experts agree that this type of investment tends to make more sense for those closer to retirement, generally age 50 and older.

Annuities are personal retirement vehicles that allow the owner to accumulate money in tax-deferred investment accounts and also to withdraw funds before his or her death. They used to be defined by two categories: fixed annuities, which guarantee a minimum return (usually 3%) or minimum monthly payment, and variable annuities, which allow the owner to invest money in stock and bond mutual funds with the hope of securing a higher return. Fixed annuities are the safest option. Variable annuities are riskier because their rates of return fluctuate with the market.

Last year, there was a push by several insurance companies to expand the categories of annuities in answer to growth-hungry, yet market-shy, investors. The result: hybrid annuities that are part fixed annuity and part variable annuity. Also, for an additional fee, insurance companies will tack on long-term care policies, principal guarantees that can be adjusted annually, and some control over investments.

DETERMINE YOUR FINANCIAL GOALS
Annuities are not for everyone. To decide whether they make a good fit for you, first consider your financial goals. What do you plan to do with the money? Use it for your retirement? Hand it over to your kids as an inheritance?

Don’t skip this crucial step. Prioritizing your goals is

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