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RENEE MONTAGNE, HOST:

In today's conversation about baby boomers and their finances, we're talking about annuities. This is a $200 billion a year business for the life insurance companies and financial institutions that sell annuities. What they are is a kind of private pension people can buy for themselves, to create regular income for after they retire.

To talk more about the benefits and the risks of annuities, we're joined by Kim Lankford. She's a contributing editor at Kiplinger's personal finance magazine. Good morning.

KIM LANKFORD: Good morning. Thank you for having me.

MONTAGNE: Now, let's begin with a real basic thing. How old are people when they start buying annuities?

LANKFORD: Well, annuities are generally for retirement, and there are several different kinds of annuities. Variable annuities, which is one that has very large sales right now, are targeted towards people in their mid-50s to mid-60s, who are about to retire in about 10 years; and they worry about what might happen if there's a market drop right before they start to need the money.

Now, there's another kind of annuities, called immediate annuities. And those are for people who have already retired. They're in their 60s or their 70s. And you put a lump sum of money into that, and it starts to pay out immediately. But all of them are focused on some sort of retirement savings.

MONTAGNE: How, exactly, do they work?

LANKFORD: Well, the immediate annuities are the easiest ones to explain. And they're the ones where you put in the lump sum, and it starts to pay out. And because interest rates are so low right now, the payoffs are not particularly good, compared to how they had been several years ago. Right now, a 65-year-old man - if he invests $100,000, he'd get about $6,800 per year. And the older you are when you invest the money, the more your annual payouts are. So if you invest it at 75 instead, you'd get about $9,200 per year right now. And that's all based on interest rates.

If interest rates were to go up, people who invest that money then would get more for their annual payout. But the key thing is, you're locking in whatever the payouts are when you purchase the annuity. In order to get those highest payouts, the payouts will stop when you die. You can also get ones that pay out as long as you or a spouse live, or maybe as long as you live plus 10 years; and that will all lower your annual payouts. You have all these choices to make but in order to get the highest amount, those ones stop when you die.

MONTAGNE: That might be a very good idea for someone right at retirement - given interest rates in a savings account, which are usually like, .01 nowadays.

LANKFORD: Well, pros and cons. Unlike a savings account, you can't ever get that lump of money back. So that money that you're getting back, part of it is interest; part of it is return of your own principle. So, you know, at the end, there's going to be nothing left. But the key thing is, if you don't worry as much about what's going to happen after you die, but you're really worried about being able to pay those bills while you're alive, then this is one way to get that regular income - and especially if you don't have a pension coming in.

MONTAGNE: And, of course, that eliminates a lot of people who are concerned for a spouse or children, that they inherit something.

LANKFORD: That's true and that's you really need to set your priorities. And that's why there's several different kinds of annuities. For people who are interested in having some money in the end, or being able to access that money in a lump sum and in an emergency but still have guaranteed payouts, those are the people who are interested in what's called a deferred annuity. You invest a lump sum and they guarantee that you can access a certain amount of money every year, but you do have the flexibility in order to take that money in a lump sum if you need to. The deferred annuities are for the people, when they're 55 to 65 or so, who haven't retired yet, are trying to lock in some income.

MONTAGNE: And that group - those pre-retirement, near retirement group - that would be the baby boomers that we're talking about.

LANKFORD: That is correct. So the insurance companies are seeing that this is a huge potential market.

MONTAGNE: Just to be real specific about one thing, if someone has, say 30 or 50,000 dollars in a savings account for retirement - a retirement savings account - why not just put the money in a bond or a mutual fund - or just invest it in say, stocks?

LANKFORD: It's a good idea to invest some of that money in stocks, some in fixed income and have an overall portfolio. And that's the key thing. If you talk with a financial planner, they say, usually, a key thing to look at is what are your expenses in retirement, what guaranteed income do you have coming in - from a pension, from Social Security, and what is that gap, what do you need that regular income coming in that you have no guaranteed source of income? That's what they say should maybe go into an annuity, but then invest the rest of your money in stocks funds and bond funds, things that can grow for the future without the extra fees of annuities, because a lot of these annuities have some very high fees, so you really need to be careful about how you put this into the context of your overall portfolio.

MONTAGNE: Kim Lankford is a contributing editor with Kiplinger's Personal Finance magazine and a columnist for Kiplinger.com.

Thanks very much for joining us.

LANKFORD: Oh, it's my pleasure.

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MONTAGNE: You can read more about annuities at npr.org.

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MONTAGNE: You're listening to MORNING EDITION from NPR News.

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