Immediate fixed annuities can sometimes seem like God's gift to retirements. But these financial vehicles aren't the right choice for everyone.

In an immediate fixed annuity, you plunk down a lump sum with an insurance company; in exchange, you're promised a certain regular payout for a certain period -- 10 years, 20 years, or often the rest of your life. Check out the following payouts these hypothetical people could get from an annuity, based on an initial lump sum of $200,000. (I'm assuming the annuity pays until the death of the owner or owners, with no payments to beneficiaries.)


Monthly Payout in Retirement

Equivalent Annual Payout

65-year-old man in Ohio



70-year-old woman in California



70-year-old couple in New York



65-year-old couple in Florida




Impressive power
Those numbers tell you a lot. For one thing, women will generally get a smaller payout, because of their longer life expectancies. But any buyer with enough money can secure a rather reliable pension-like income in retirement. If getting $15,000 per year seems paltry, try tripling the numbers. For $600,000, some folks can arrange for a $45,000 income. Add Social Security to that, along with perhaps some dividend or bond income, and you're looking at a reasonably comfortable retirement.

That kind of power has not gone unnoticed in the retirement-account industry. More and more 401(k) plans now offer an annuity option. There are different ways that this can work; in some cases, employees can convert some or all of the value of their 401(k) into an immediate annuity upon retirement, while others can invest in a deferred annuity throughout their working years. Genworth (NYSE: GNW), Prudential (NYSE: PRU), SunTrust (NYSE: STI), and MetLife (NYSE: MET) are among the insurance companies seeking to improve their profits by selling employers on the idea of offering annuities to their employees. Buyer beware, though: Deferred and variable annuities are generally less wonderful than immediate and fixed annuities, so be sure to read up on the terms, fees, and alternatives.

One way or another, annuities are proliferating in retirement plans. A recent survey shows roughly 14% of employers offering an annuity option, up from 8% last year, with 28% saying they're likely to add the option this year. That's fast growth! Paychex (Nasdaq: PAYX), IBM (NYSE: IBM), and Smithfield Foods (NYSE: SFD) are among the employers already offering annuities to employees.

And here's the catch …
Despite the beauty of the annuity as part of a retirement plan, most Americans simply can't afford to buy as much income as they need.

The average 401(k) account balance in Vanguard-managed 401(k) plans was $69,000 at the end of 2009. According to the 2010 Retirement Confidence Survey (RCS), fully 27% of American workers have saved less than $1,000 for retirement (excluding the value of their homes or pensions), while more than half have saved less than $25,000. The picture's not much prettier for workers nearer retirement. The RCS found that 42% of workers ages 45 or older have saved less than $25,000, and 82% have saved less than $250,000. From the tables above, you can see that even a $250,000 nest egg probably won't generate the kind of income you'll want in retirement.

And even for those who can afford annuities, most such vehicles don't adjust payouts for inflation. In 25 years, your regular payments might have only half the buying power as your income today.

Still, don't freak out. It's not too late to salvage your retirement, one way or another. Combined with disciplined saving, annuities might play a role in helping you put together a workable financial plan.

Working just seven more years can give some people a million more dollars.