What Does This Article Cover? What is the only product that can provide a guaranteed retirement income for life? What are the reasons you should buy an annuity? Do you know the difference between a fixed and variable annuity?

A steady retirement income that you can't outlive — that's the goal for all retirees — present and future.

In the past, retirees could rely on Social Security and employer–sponsored pensions to provide that steady income. Over the years much has changed. Most notably people's longevity has increased while the certainty of Social Security and employer pensions has taken a nosedive. By all estimates, the next generation of retirees, Baby Boomers, will live longer and spend more time in retirement than any generation. The question is will they have an income that lasts as long as they do?

Currently there is only one product that provides an income stream people can't outlive: an annuity. While annuities have become increasingly popular over the past few years, exactly how they work and their role in a well–rounded retirement plan is still not well understood. For example, people may believe annuities are only for the rich. But demographic data shows that over three fifths of non–qualified annuity owners have total household incomes of less than $75,000 and two in five owners of non–qualified annuities have household incomes less than $50,000 per year. That means that practically anyone can afford an annuity.(Gallup, 2001 Survey of Owners of Non–Qualified Annuity Contracts)

With annuities as a potential option for so many people, what should potential first–time buyers look for in an annuity. Below are eight tips for first–time annuity buyers.

If You Don't Save, Annuities Can't Help
But first things first. While annuities can ensure you don't outlive your income one thing they can't do is make you put money away for retirement. It is your responsibility to determine whether your income stream is a trickle, a gushing river, or something in between. Right now there is cause for concern. For the first time since 1933, the savings rate in America is almost zero. In 2000, the average American household saved only 1% of its disposable personal income. Nearly two–thirds of American workers have no retirement savings account. In order to be prepared for your retirement years, begin saving as much as you can, as early as you can. Regardless of your age, it is never too late, or too early to start planning for your retirement. When you have accumulated some retirement savings the tips below may prove helpful. (Source: Bureau of Economic Analysis – Department of Commerce, in National Saving: Answers to Key Questions, June 2001)

1. Understand How an Annuity Works — The easiest way to understand an annuity to is to think of it as the opposite of life insurance. It pays when you are alive; life insurance pays when you die. More formally, an annuity is a contract between you (the annuitant) and the issuer, usually an insurance company. You give the issuer money in either a lump sum or through regular payments. The interest your money earns accumulates on a tax–deferred basis and then, at a specified date, you begin to receive payment(s), either a lump sum or at regular intervals (e.g. monthly) for a specified period of time, usually between 5 –20 years or for life. Unlike many qualified retirement savings vehicles, there is no limit to how much you can invest in an annuity. In most cases, you cannot withdraw the money in an annuity before age 59½ without incurring penalty fees from both the IRS and the insurance company (see below). When you begin to receive annuity payments, it is time to pay the taxes that have been deferred.
2. Determine If an Annuity is Right for You — While tax deferral makes annuities attractive, they are usually not the first option in a retirement plan. Consider purchasing an annuity only after you have fully funded your IRA, 401(k) or 403(b) plan for the year. These investments use pre– tax money and are the first step in long–term retirement planning. If you have additional funds to invest, annuities, along with mutual funds, bonds and stocks may be an option. All of these can be present in a well rounded retirement plan.

   If having immediate access to your money is important, an annuity is probably not the right choice. If, however, you have extra liquidity and a long–term savings goal, the benefits of tax–deferred growth could make an annuity an excellent choice.

   Also consider an annuity if you have received:

   • A lump sum from a pension plan
   • An inheritance or
   • Money from the sale of a home or business.
   The best way to determine if an annuity fits your situation is to sit down and discuss your goals with a trusted financial professional.
3. Understand the Basic Types of Annuities — There are a large number of annuity products available today and one of the reasons annuities are not well understood is that some of the terms used to describe the various products can be idiosyncratic. To make an informed decision it helps to know some of the basic terms used to describe annuities.

   Immediate or Deferred?
   With an immediate annuity, the owner makes one lump–sum premium payment and begins to receive cash immediately. This is for people who need immediate income from their annuity. With an immediate annuity you can choose how long you would like to receive payments. Typically options vary from 5–20 years and life and or your surviving spouse's life (see below).

   Deferred annuities are the most popular for people who are still saving for retirement. They are called deferred annuities because payments are deferred until a future date. Also the tax on the investment gain within the annuity is deferred until you begin to receive payments. This means that the amount can grow faster, due to the tremendous power of compound interest.

   Fixed or Variable?
   Fixed annuities guarantee a stream of fixed payments over the life of the annuity. The insurer or issuing company takes the investment risk. Fixed annuities are viewed as secure investments by many people because the insurance company usually invests the money in government securities and high–grade corporate bonds. Fixed annuities offer a minimum guaranteed rate of return. Note it is not unusual for companies to offer a higher initial interest rate for a specified number of years and then a new rate, in the subsequent years. The rate is fixed usually for only one year at a time and is based on investment results.

   Variable annuities are long–term investment vehicles designed for retirement savings. They give annuity owners both more control and more risk. Variable annuities also enjoy tax–deferred status*, but enable owners to direct their investments, from conservative to aggressive, through a series of sub–accounts or investment divisions. Keep in mind that assets allocated to the investment division are subject to market risk and may fluctuate in value. There are fees and charges associated with these contracts. The owner is able to transfer money among these sub–accounts^#. A variable annuity offers investors opportunities for higher potential growth than is usually available with a fixed–interest annuity. This potential also carries with it the risk to incur investment losses. The amount of monthly payment is not fixed, but rather is determined by the results achieved by the annuity owner's investment choices.

   *Tax–qualified plans (like IRAS, TSAs and SEPs) already provided tax deferral under the Internal Revenue Code, so the tax deferral of an annuity does not provide any additional benefits. Also, variable annuities are subject to additional fees to which other tax–qualified plan funding vehicles may not be subject.

   ^#This policy is not designed as a vehicle for market timing. Accordingly, your right to make transfers under the policy is subject to limitations, if we determine, in or sole opinion, that the exercise of that right may disadvantage or potentially hurt the rights or interests of other policy owners.

   Variable annuities are sold by prospectus only. You should contact your Registered Representative for product and fund prospectuses. Investor are asked to consider the investment objectives, risks, charges and expenses of the investment carefully before investing. Both the product prospectus and the underlying fund prospectuses contain this and other information about the product and underlying investment options. Please read the prospectuses carefully before investing.

4. Understand the Payout Options and Surrender Charges
   There are five basic payout options for all annuities, they are:
   1. Life Only: This option pays the most for each dollar of premium paid into the annuity. Payments however are made only until your death. Payments stop when you die. If you die before the payment of all funds, the company keeps the excess.
   2. Certain and Life: Payments made for a predetermined time usually between 5 and 20 years. This is called the period certain. If you die before this period expires, your beneficiary receives payments until the end of the period. If you live beyond this time, payments continue until your death.
   3. Fixed Period: Under this payout method, the company guarantees payments for the number of years specified in the contract, again usually 10 or 20 years. If you die before the specified number of years, the company pays the remainder to your beneficiary or your estate.
   4. Fixed Amount: You receive payments until the funds are exhausted. If you die before all funds are paid out, the remaining proceeds are paid to your beneficiary or estate in a lump sum.
   5. Joint and Last Survivor: This plan makes payments as long as the two people named in the policy are alive. When one dies, the amount of payment may be reduced according to the terms of the contract.

   Surrender Charges and Other Fees
   To receive the benefit of tax–deferred growth, you sacrifice liquidity. This sacrifice takes the form of penalties both from the IRS for early withdrawals, usually before the age of 59½ and surrender charges or other fees from the insurance company for canceling the annuity contract or withdrawing funds within a certain number of years. The IRS can impose a penalty of 10 percent for early withdrawals. Insurance company surrender charges for most annuities can start at seven percent for the first year and decline by one percent each year until they disappear, usually after year eight. These penalties serve to underscore the long–term nature of deferred annuities, whether variable or fixed. Many annuity contracts, however, allow you to withdraw 10 percent annually without incurring any surrender charges. Always be sure to check tax consequences and potential penalties before making any withdrawals from an annuity.

   Some annuities also have front–end loading fees(fees subtracted from your annuity when you first purchase the policy) or yearly maintenance fees. Make sure you are aware of all the fees associated with an annuity before making any purchase.

   Some insurance companies also provide a bailout provision which enables owners to withdraw all their money without incurring any surrender charges if the interest rate they are paying drops below a specified rate.

5. Look at the Quality of the Company — An annuity is only as good as the company that backs it. You want to know for certain that the company that issues your annuity will be around to make payments. To help you discern the strongest companies, there are several ratings agencies that rate insurance companies on the quality of their fiscal fitness, quality of investments and overall financial soundness. A credit rating represents an independent assessment of the insurer's ability to pay its claims on time and meet all its other financial obligations, the bottom line for any life insurance company. There are four leading agencies: Best, Standard and Poors, Moody's, and Fitch.

   Each agency has slightly different criteria and looking at different ratings for one company will give you a good overview of the company's financial strength. New York Life's ratings are among the highest from each of the four agencies (Click here for more on New York Life's ratings.)

6. Consult an Agent — Agents provide an invaluable service. First, an agent can help you factor in the other "human' elements into your annuity thinking and help you understand both the terminology and exactly what your annuity will provide for you. For example, your agent can make sure you understand which value are guarantees and which are estimates or projections.

   The relationship you develop with an agent can last a lifetime. Second, an agent can help to reassess your retirement planning strategies as your needs change. They can help you guide you through a lifetime of financial decisions, giving you one less thing to worry about. You can click here to set up a meeting with a New York Life agent.

7. Be Wary of Exchanges — One final tip: once you have purchased an annuity, be wary of any sales person who encourages you to exchange or replace your annuity with another. While there are instances in which replacing an annuity helps the annuity owner, the practice usually only generates a commission for the sales person, while the annuity owner may incur surrender charges and withdrawal penalties.
8. Know Your Risk Tolerance — Risk tolerance, simply put, is the answer to the question, "How much of your investment are you willing to put at risk (i.e. lose) in order to possibly receive a higher return. If your answer is "none," you have a very low risk tolerance and should probably seek out an annuity with a guaranteed fixed interest rate.

   If your answer was somewhere between "a little" and "all of it" your risk tolerance is between low and high, which means you have a wide range of options to explore. One of these options may be Variable annuities, which offer a wide selection of investment options from aggressive growth funds to more conservative choices. Due to market fluctuation, the more aggressive the fund, the greater the risk for your investment.

Your financial professional, such as a New York Life agent or NYLIFE Securities Registered Representatives, can provide tools that can help you identify, and then select annuities that align with, your personal objectives and risk tolerance.

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