Annuities have become a darling among many people planning for retirement. Once purchased chiefly by the wealthy, annuities are readily available for middle-income earners and are offered by several different companies. Annuities are a form of contract sold by life insurance companies that guarantee a fixed or variable payment to the annuity holder, usually at retirement. All capital in an annuity grows tax-deferred. These instruments have caught on among investors in recent years because they are one of the few financial products that guarantees an income for life, said Jack Dolan, a spokesman for the American Council of Life Insurance.
Variable annuities are the most popular type.
Thus they are akin to mutual funds in that their rate of return can increase or decrease depending on the underlying investments. Fixed annuities offer a fixed rate of return and they don't offer subaccounts. But they might be the preferred investment during a downturn in the stock market. Annuities are not for everyone, said Natalie Grossner, a certified financial planner in Carmichael. The purchaser should be sure that they are comfortable tying up their money for several years, typically at least five, because there are steep financial penalties for pulling money out early.