Annuities fit long-term retirement objectives

Current forecasts for 2002 indicate the economy and stock market are poised to recover. But many investors are still concerned about market volatility.

If you are looking to start getting back into the market to prepare for your long-term planning and retirement needs, variable annuities may work for you.

An annuity is an agreement between you and an insurance company. In exchange for the money you put in, the insurance company agrees to pay you a guaranteed future income stream. The guarantee is backed by the claims-paying ability of the issuing insurance company.

There are two phases to an annuity the accumulation phase and the distribution phase. During the accumulation phase, your money accumulates without current taxes. The distribution phase provides you a regular, systematic income for the period you indicate whether it's a set number of years or the rest of your life.

The most powerful advantage of an annuity is that your investment has the opportunity to grow tax deferred, so you pay no taxes until you make a withdrawal or begin receiving a regular income stream.

With tax deferral, you have the opportunity to earn money on your initial investment, as well as on your earnings that compound over time.

A variable annuity provides investment flexibility and the ability to participate in potential market returns.

Variable annuities offer "subaccounts," which invest your money in stocks, bonds and money-market securities. Variable annuities offer several features to help enhance your investment, including:

Professional money management. Professional money managers invest your money in stocks, bonds and other securities based on your investment style.

Tax-free reallocations. As your investment objectives change, you can easily adjust your strategy by switching from one investment subaccount to another, with no tax consequences and usually no charge.

Dollar cost averaging. This strategy lets you systematically invest your money into a combination of subaccounts, taking the worry out of trying to guess the "best" time to invest. As with any investment strategy, dollar cost averaging does not ensure a profit or protect against loss in declining markets. Since such a plan involves continuous investment in securities regardless of fluctuating prices, you should consider your financial and emotional abilities to continue purchases through periods of low price levels.

Death benefit guarantee. If you die before annuity payments begin, the issuing insurance company guarantees that your heirs will receive at least your original investment, less withdrawals, upon your death. This means that even if the market value of your investments is down, your heirs are protected. This guarantee is based on the claim-paying ability of the issuing insurance company.

When you need to draw income from your annuity, you have several options.

Partial withdrawal. Most contracts allow a lump sum of up to 10 percent of the total investments to be withdrawn without incurring a sales charge.

Systematic withdrawal option. This automated service allows annuity owners to withdraw up to 10 percent of the total investment in monthly installments.

Annuitization. This income option spreads the value of the annuity over monthly payments to you for a certain time period or for as long as you or your beneficiary live. Most contracts allow quarterly, semiannual or annual payment options, with income continuing during your lifetime or your spouse's lifetime.

If you elect to take partial withdrawals or systematic withdrawals before age 59 l/2, in most cases, there is a 10 percent federal penalty tax in addition to the regular income taxes due. Keep in mind, the value of a variable annuity will fluctuate and when redeemed, your investment may be worth more or less than the original investment.

(The preceding article was provided by Timothy M. Reese, vice president of investments with A.G. Edwards & Sons, member SIPC.)