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It makes a lot of sense to consider annuities for retirement income, as they're designed to deliver regular infusions of cash to you automatically. Making mistakes when buying an annuity can be costly, though, diminishing your financial security. Here are five valuable tips regarding annuities.

Hundred-dollar bills flying through the air

Image source: Getty Images.

Know your annuities

First, it's important to know that there are different kinds of annuities so that you can choose the kind that's best for you. For example, annuities can be immediate or deferred paying you immediately vs. starting at some point when you're older), fixed or variable certain payouts vs. payouts tied to the performance of the market or part of the market), lifetime or fixed-period (paying until death or paying for a certain span of time), and so on.

Some annuities, such as indexed annuities and many variable annuities, are problematic and unsuitable for many people, as they charge steep fees and/or carry restrictive terms. The Securities and Exchange Commission has warned, "For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity." Indexed annuities, meanwhile, feature major drawbacks such as capped returns. If your annuity bases its return on the S&P 500 and features a 4% cap, the S&P 500 might surge 20% in a given year, but you'll only get a 4% gain.

On the other hand, fixed annuities, whether immediate or deferred, are smart options for many retirees or those approaching retirement. You pay an insurance company or financial services company a lump sum (or installments), and in return, you receive payments -- now or later. The payments are often monthly, but can be quarterly, annually, or even a lump sum. They can last for a fixed number of years or for the rest of your life.

Pay a little extra (or accept smaller checks), and you can have your payouts last until your spouse's life ends, too, and/or be adjusted to keep up with inflation over the years. As an example, $100,000 can buy a 70-year-old man about $640 per month, or $7,700 per year. A $300,000 purchase can generate about $23,000 annually.

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Posted 5:04 AM

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