Annuities are kind of … weird.

There are some great reasons to buy one. But they tend to be even more confusing than other confusing types of investment.

So should you buy an annuity?

The answer is, as with just about every retirement question, it depends.

But the good news with annuities is that it’s pretty clear what it depends upon — your tolerance for risk, how much you’ve put into other investments, and whether or not you have kids.

But first, some definitions are in order.

Annuities are insurance products. And there are multiple forms of them. One of the most common versions for retirement is a fixed, immediate annuity. To buy such a product you hand over a lump sum of money to an insurance company, which then pays you a fixed amount over time. The check the insurance company sends you is based on how much money you gave them and how long they expect you to live.

A fixed, deferred annuity is sort of the opposite. You hand over your money and the insurance company pays you a fixed interest rate. One advantage of this style if that the interest grows tax-free until you start pulling your money out.

If you’re considering an annuity, it may be wise to walk through this checklist to see if such an investment is suitable for you.

What you’ll find is that there are three factors that will drive your decision.

First, your level of nervousness as you enter retirement: If you’re worried that you will outlive your savings, a fixed, immediate annuity may be a very wise choice. You can buy them in almost any size imaginable. So you can take, say, $100,000 of your savings and shop around to see what sort of income an insurance company will guarantee to pay you over time. A quick look around the Web as we write this shows that a 65-year-old resident of New York State with $100,000 to spend could get a guaranteed monthly payment of around $650 a month for the rest of his life.

Second, how much you’re saving as you prepare for retirement: Annuities are generally more suitable for older people than younger. If you haven’t yet reached your 45th birthday, there’s probably better places for you to stash your cash. But if you’re 45 or older — and you’re already saving the legal maximums for your age in a 401(k) and IRA — it’s time to look at some alternatives, including annuities.

Third, think of the kids: Are you making investments for you, or for your heirs? Because if you’re thinking about leaving a legacy, an annuity is not the right vehicle. The obvious reason for this is that a fixed, immediate annuity is designed to provide income for your lifetime. Once you’re gone, so is the annuity (there are exceptions. Some annuities will pay out to a beneficiary. So read the fine print, like, 10 times!)

Read: What Are Diversification and Asset Allocation?

There is another form of annuity, however, that is marketed as having some interesting tax breaks attached to them — the variable annuity.

But the thing about VAs is that although you get a tax break, the folks you leave behind will not. That’s why we like this classic bit of advice from Jane Bryant Quinn: “When they (your heirs)  sell, they’ll owe higher taxes on VAs than they would have on comparable mutual funds. For a tax-deferred investment intended solely for heirs, consider a cash-value life insurance policy where all the proceeds pass tax free.”


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