Savings Guarantees You Can Trust

Annuities and other products promise secure income. But only some deliver.

By Kimberly Lankford, Contributing Editor

Elizabeth Ody, Associate Editor

From Kiplinger's Personal Finance magazine, April 2009

What shellshocked investors crave most today is a guaranteed return on their money, and investment firms and insurance companies are happy to oblige. Their aggressively marketed products range from annuities with attractive annual payouts to more-exotic hybrid investments that promise to return your money and more -- if everything works out.

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Can you count on those tantalizing assurances? It depends on the financial strength of the companies that offer them and the safety nets that back them up. We looked at four investments that promise to protect your money or pay up based on certain guidelines. We found that some are better than others at keeping their promises.

Annuities: Income for Life
Retirees began flocking to variable annuities with guaranteed benefits a few years ago. These insurance contracts often involve lump-sum investments of $100,000 or more. In return, you can count on generous annual withdrawals without fear of outliving your savings.

But the assurances come at a steep price. Investors often pay from 0.6% to 1% of their initial investment amount -- on top of a standard annuity fee of about 1.4% a year -- for guarantees that include minimum withdrawal benefits or minimum income benefits.

With a guaranteed minimum withdrawal benefit, you can tap up to a certain amount each year -- often 5% to 6% of your initial investment for the rest of your life, no matter how the annuity's underlying investments perform. Some annuities even allow you to boost your annual withdrawals if your account value increases, creating an income substantially higher than you could safely afford to withdraw from your own savings without fear of running out of money.

A variation, called a guaranteed minimum income benefit, also allows you to withdraw up to a certain amount of your initial investment each year (typically 5% to 6%) until the account is nearly depleted. At that point, you can convert the initial value of your investment into a lifetime stream of income, a process known as annuitization. Although you give up control of your money (the insurance company retains any leftover funds after your death or the death of your beneficiary), you may be able to increase your annual withdrawals to 8% or more. The older you are when you annuitize, the higher your payouts.

How Strong a Net?
When Lynn DiGiovanni of Spring, Tex., retired from Exxon in 2007, she bought a variable annuity from Allianz Life Insurance. Lynn, then 55, and her husband, Richard, were attracted by the promise that after ten years their initial investment would be worth at least twice as much for the purpose of calculating withdrawals, no matter how their investments actually performed. At that point, they could begin to withdraw 5% of the higher guaranteed amount every year as long as either of them remained alive (and more if their investments performed better than expected). "We come from families with great longevity and we wanted some guaranteed income," says Lynn. "This allowed us to invest with a built-in safety net in the event the economy deteriorated."

That safety net, which allows them to base their future annual withdrawals on the higher guaranteed account value, is looking pretty good to the DiGiovannis right now. Their account took a big hit in the stock-market meltdown and is now worth about half of their original investment. Although they will be able to cash out penalty-free once their surrender period expires in four years, they may not want to if their investments don't rebound. That's because if they wanted to cash out, they would be able to tap only the actual, reduced amount of their account, not the higher guaranteed amount that is used to calculate annual withdrawals, says Michael Bartlow, co-founder of AnnuityGrader.com. If, however, their investments do outperform the guaranteed return, they could base their annual withdrawals on their actual account balance. Or they might want to take the money as a lump sum and run.

Surrender periods typically range from three to seven years on these types of annuities. (Cashing out before the surrender period ends can be very expensive, often costing you as much as 7% of your initial investment in the first year. The penalty declines to 1% in year seven and then zeros out.)

More-typical investors, who begin taking 5% or 6% withdrawals immediately, may be tied to their annuities forever because those substantial withdrawals coupled with poor market performance could severely deplete their account balance. Normally, financial advisers recommend that retirees limit their initial withdrawal to 4% of their savings, with slight increases in sub-sequent years to offset inflation. "They're tapping their money at a more aggressive rate than they would have if they didn't have an insurance company behind them," says Chris O'Flinn, president of ElmAnnuity.com, in Washington, D.C.

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