Last Updated: September 28, 2009 

When it comes to planning for retirement, a growing number of Americans are reportedly considering the use of annuities. The Gallup Organization, in conjunction with the Committee of Annuity Insurers, recently released the findings of a survey which shows that annuities are used as a "trusted retirement tool by the middle class." In addition, the survey results show that despite an overall decline in consumer confidence regarding retirement savings, "the majority of annuity holders believe they have enough or more than enough money to cover their financial needs in retirement."

But as with many things in life, there's always more than one side to every story. Here's what FPA® member, Ed Green, CFP®, ChFC, AIF®, a partner with the Foster Group, Inc., says you should consider when contemplating annuities:

• "In general, consumers substantially underestimate the level of assets required in order to sustain the type of lifestyle they expect in retirement. This problem is not solved by using an annuity, or any other investment vehicle, for that matter.
• "While annuities have their place, you should not consider them a one-size-fits-all solution. Like other financial products, they fit better in some situations than others. Viewing them as the only solution is shortsighted and can lead to problems.
• "Annuities can indeed provide protection for an owner 'outliving their assets.' This may be especially important to an investor with a family history of longevity.
• "Annuities can also provide some protection against 'spendthrift' tendencies. Once annuitized, the investor no longer has the ability to withdraw at will and must live within the income stream provided by the annuity. In the case of an investor with little control over their spending, this is essentially a way of protecting the investor from himself or herself.
• "When shopping for annuity products, you should make certain you understand all the underlying costs related to the contract. You should remember that, first and foremost, you are buying a type of insurance contract, and there is a cost associated with the insurance being provided. You should also be very certain you understand any early-surrender penalties that may be involved.
• "Annuities are often sold on the merits of their tax benefits, but they can be somewhat tax-unfriendly. Because they are not treated as capital assets, they never receive the more favorable capital gains treatment on gains that may accumulate inside the contract. This affects not only the contract owner, but also any named beneficiaries who may inherit the contract in the future.  Annuities do not receive a step-up in basis at the death of the owner as does a portfolio of stocks, bonds or mutual funds.
• "You should also be aware that payout rates are not standardized. In other words, the monthly income generated by a block of money under one insurer's contract will be different than that paid by another insurer. It pays to compare contracts.
• "Choosing the correct annuitization option can be confusing. When dealing with joint annuitants, this complexity increases. You need to be very clear on why you're selecting the particular payout option."