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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: Annuities Date: 2/14/2005 7:10 PM
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An annuity is a contract.
There are two flavors, fixed and variable.
In a fixed annuity, you sent the company (usually an insurance company) a sum of money, and they promist that beginning on such-and-such date, they will pay you a certain amount every month, either for as long as you live, or perhaps for as long as either you or your wife is alive, etc. There may be a guarantee that the payments will last at least a certain period of time.
In a variable annuity, you invest in a variety of mutual-fund lookalikes.
An annuity can be immediate or deferred. In an immediate annuity, the monthly payments begin immediately.
In a deferred annuity, your account earns interest or is exposed to the stock market until you decide to "annuitize" which starts the stream of payments.
The salesman who sells you the annuity makes a hefty commission, and the mutual fund lookalikes have higher expenses than the same fund outside the annuity. For these reasons, annuities generally have a bad reputation. There are a few companies, Vanguard and TIAA-CREF being among them, that don't charge nearly as much.

Of course it is beneficial to have a stream of income; the question is can you put the money that would buy it to better use elsewhere?

Best wishes, Chris
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