Some annuities can be extremely helpful in retirement, essentially letting you create your own pension. But one kind of annuity, the variable annuity, is often a bad idea.

Why? Well, for starters, they often sport hefty fees, sometimes topping 2% of your assets annually. On an account valued at $100,000, those fees would take $2,000 per year. They can deliver big tax blows, too, as your ultimate withdrawals are taxed at your ordinary income rate, not the usually lower capital gains tax rate. Money left in it when you die can generate a tax hit for your beneficiaries.

Another concern with annuities is that you're relying heavily on the health of the insurance company that sells them. Although state guaranty associations backstop annuities to some extent, you can still end up receiving less than you expected from your investment if your insurer goes under. That's why it's smart to pick strong companies, and sometimes even to divide your purchase among several different companies.

Developments afoot
Recently, many insurance companies have been tweaking their annuity offerings, raising fees and reducing guarantees. Well, I just learned that one of the most respected insurers out there, New York Life (which has earned top ratings from several raters), is actually rolling out a new offering of variable annuities -- a market it hasn't traditionally tapped extensively in the past.

In part, the company is cashing in on its solid reputation. The initial information is a bit vague, though; according to the company, the annuities will focus on "simplification, low cost, and transparency." So if you find yourself tempted by this new annuity, be on the lookout for more details, and be sure to learn a lot about it before signing anything.

Look inward, too, to see why you might be drawn to annuities and why companies are cranking out more of them. The recent stock market implosion surely has a lot to do with it, as does the gradual disappearance of pensions. Investors are scared and are looking for more reliable payouts. Thus, companies are seeing that there is money to be made offering annuities. New York Life actually re-introduced more attractive immediate annuities four years ago and has seen that business grow to $1.2 billion in assets under management, a tenfold increase.

Here's another idea
Meanwhile, consider this: You can save costs and get growth and income in retirement by investing directly in stocks or low-cost mutual funds. For instance, investing in solid dividend payers that increase their dividends regularly and significantly can provide you with a consistent and rising stream of income. Below are a few companies with yields of 3% or more that are highly rated in our Motley Fool CAPS community of investors -- I've modeled what your annual take would be, if you had $10,000 invested in each:


CAPS Stars
(out of five)

Recent Dividend Yield

Annual Dividend
on $10,000 Invested

Waste Management (NYSE:WM)




Taiwan Semiconductor (NYSE:TSM)








Penn West Energy (NYSE:PWE)




NYSE Euronext (NYSE:NYX)




Novartis (NYSE:NVS)




Hasbro (NYSE:HAS)




PepsiCo (NYSE:PEP)







Data: Motley Fool CAPS.

If that total grows by just 6% per year, in 20 years you'll be collecting a total yield of $12,250 -- on top of capital appreciation -- just from a $70,000 investment.

What to do
Of course, as we've seen in the past year, even good dividend stocks can lose value over the short run. The guarantees that some variable annuities provide have helped shelter their owners from much of the bear market's damage recently, and that's a big part of why they've become more attractive.

But with stocks down so much from 2007 levels, you're arguably less likely to see extensive losses from here. If you think stocks are more likely to go up from here than down, then paying up for those guarantees doesn't make much sense.

Should you get out of stocks now before it's too late? John Rosevear has the answers you want right here.

Longtime Fool contributor Selena Maranjian owns shares of Novartis and PepsiCo. NYSE Euronext is a Motley Fool Rule Breakers pick. PepsiCo and Unilever are Motley Fool Income Investor recommendations. The Fool owns shares of Hasbro, which is a Motley Fool Stock Advisor recommendation. Try any of our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.