The sales pitch sounds sexy—pay a little now, and get big payouts later to cover your retirement expenses. But are annuities really as simple as that? Tom Henske shares how to know if an annuity is right for you.

Bottom Line/Personal: I’m wondering, do annuities represent a good strategy for some individuals who are hoping to have a secure retirement?
Thomas J. Henske, CFP I think they’re going to play a very important role. Think about longevity. A 62-year-old couple today has a joint life expectancy of 30 years. That means, statistically, one of them is going to live into his or her 90s. In a world where we don’t have pensions anymore, annuities are going to play a big part in peoples’ financial plans.
Bottom Line: Where is the best place to buy an annuity?
Thomas Henske: I think the best place to start is with your financial advisor. He or she is going to be the person that really has a keen understanding of your particular situation. There are so many products out there…you have to really be careful about matching the right product with the right situation.
And your next question is probably, “What happens if they don’t have a financial advisor?”
Bottom Line: Exactly!
Thomas Henske: You know what? It’s time to get one, and probably the best way to do that is just to ask your friends who they’re using.
Bottom Line: What about the traps of buying annuities? Where can I get into trouble?
Thomas Henske: I think you get into trouble when you don’t understand the contracts that underlie those annuities. What are the payout structures? There are a lot out there that are touting guaranteed rates of return, but what does that mean? Does that mean you get it as lump sum, or do you get it as a stream of income over your retirement? Do you have to live to life expectancy to be able to realize those gains? You really need to pay attention to the underlying parts of the contract that affect the way that you’re going to be receiving that money in the future.

So, the Bottom Line on annuities? You are going to probably live a little longer than you think, so you want to make sure you’re covered. Annuities can be a great way to do that, but they are complicated investment vehicles, so you’re going to want the help of a financial advisor sorting out the details and making sure things like the contract and the payout structure are going to work for you.