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How to Decide If an Annuity is Right for You

As you investigate the various retirement savings and investment options available to you, you will want to consider annuities. This is a complex subject, because there are several types of annuities, and a confusing array of ways to set them up and to arrange distribution of your money. After reviewing the information in this Advice column, and reading the details on the links provided, you should consult your financial and tax advisors to sort it all out.

What is an annuity? Annuities are contracts that are designed to be a source of retirement income. They are sold by banks, brokers and agents, and issued by an insurance company. Since they are not protected by government deposit insurance, it is essential that you make sure the issuing insurance company is strong and stable. You can research the issuing company through your state’s Department of Insurance, A.M. Best, Standard and Poor’s and Moody’s. Variable annuities are rated by independent sources such as Lipper Analytical Services, VARDs and Morningstar.

Is an annuity appropriate for your situation? Ask yourself the following questions to see if an annuity is suitable for a portion of your retirement assets. If you answer “yes” to any of the questions, discuss the issues involved further with your financial advisor.

1. Am I concerned about outliving my assets?
2. Am I looking to invest over the long term?
3. Am I comfortable not withdrawing most of these assets until I turn age 59 1/2?
4. Have I maxed out my 401(k) and IRA and still need tax-deferred growth?
5. Do I prefer investing in mutual funds as opposed to buying individual securities?
6. Did I just receive a large sum of money, such as an inheritance or a payout from a pension plan or 401(k)?
7. Do I need a dependable income stream from my retirement savings?

Basic kinds of annuities. There are several different types of annuities:

• Immediate annuities are purchased with a single lump sum and income payments can begin within 12 months of the purchase date.

• Deferred annuities allow you to save for retirement over the long term and not pay any taxes on the earnings until you take withdrawals.

• Fixed deferred annuities offer a guaranteed interest rate plus safety of your principle.

• Variable deferred annuities allow you to save for retirement by investing in fund-like portfolios. Your returns will depend on the investment performance of the portfolios.

For more details, including tax facts, check the Securities and Exchange Commission’s 14-page article on variable annuities.

Tax considerations. The IRS views all withdrawals from an annuity as taxable income until all income has been paid out. You will need the help of your tax advisor when you are ready to decide how you want to receive your payout – there are several options.

Information on annuities, including the tax issues involved, is included in the U.S. government’s Consumer Information Center brochure.

American Express Financial Advisors offers a number of annuities, issued by IDS Insurance Company.

Variable annuity products are sold by prospectus only. For more complete information including sales charges, expenses and risks, ask your  financial advisor for a prospectus. Investments in variable annuities include an element of risk including the possible loss of principal. Read the prospectus carefully before investing or sending money.

October 31, 2002

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