Retirement Questions and Outrage

In part, I agree with many of the concerns cited by JP Frogbottom but not exactly as he outlined them.

First, yes, AIG does sell annuities through a variety of subsidiaries. But despite the parent company's financial problems, those subsidiaries continue to meet their obligations. Even in the event the subsidiaries encounter trouble, owners of immediate annuities are protected by state guaranty associations that act as financial backstops to troubled insurers.

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Second, you do need to be careful when buying an annuity, but it's the variable annuity variety that I'd be most concerned about. Often, variable annuities are incredibly expensive, with their high commissions and surrender charges. Their terms can be quite confusing and seemed designed that way to make it an easier sell for the broker that's pushing it.

In my view, most retirement investors are wise to steer clear of variable annuities.

Immediate annuities, however, I like for their simplicity. You buy a guaranteed stream of income that lasts as long as you do. Yes, as JP Frogbottom states, your annuity income is taxed at ordinary income tax rates, which are higher than the capital gains rate. But the same is true for any withdrawals you make from an IRA, 401(k) plan or other retirement savings account. That's why it's best to use a retirement account to fund the purchase of an immediate annuity rather than a taxable investment account.

Also, this is a purchase I'd suggest for somebody in or near retirement, not for someone with a number of years left to work.

Finally, as I said in the original column, I would not steer all of your retirement savings into an immediate annuity but rather a portion. You want to continue to invest a good share in stocks, bonds and cash to provide growth potential.

Two columns last month looked at ways to use Roth IRAs to mitigate this year's market losses. First, I suggested retirement savers with traditional IRAs consider converting all or part of their accounts to a Roth IRA, which provides for tax-free withdrawals in retirement. The basic reason for this move is that today's lower stock prices mean the taxes owed on such a conversion done now will be lower than a conversion before the big drop.