Kevin Seibert, a Lubbock, Texas-based financial planner and managing director of the International Foundation for Retirement Education, stresses that advisors need to assess when clients should take Social Security. Some retirees buy a fixed immediate annuity so they can defer taking their Social Security at age 62 and 65. Reason: Their Social Security payments are higher when taken at an older age.

Seibert recommends using Social Security and pensions for essential expenses, such as food, clothing and shelter. The immediate annuity and other lifetime income investments should be used to fill any expense gap. Discretionary expenses should be funded by income from taxable accounts, personal retirement accounts, employment income and other managed sources.
Seibert recommends combining a systematic investment withdrawal plan with an immediate income annuity in retirement. With a systematic withdrawal plan, the client withdraws a specific percentage or dollar amount from an account, say monthly.

By combining a systematic withdrawal plan with an immediate annuity, he says, a client can increase the allocation to stocks for growth because less money must be withdrawn from other accounts. A 3.5% systematic withdraw rate, for example, combined with an immediate income annuity would help a retiree's money last longer. Among the benefits of immediate annuities:
The policyholder only pays taxes on about 40% to 60% of the immediate annuity income, based on his or her age. The rest is considered a return of principal.
Newer contracts offer cost-of-living adjustments so that the income will rise with inflation. Beware that if a client selects any of these options, monthly payouts will be slightly lower than without the options. For example, Blunt, of New York Life, says his company offers three types of expanded inflation protection. With the "Annual Increase Option," the policyholder gets less income up front. But payments should increase annually by 1% to 5%, depending on the percentage chosen. The "Changing Needs" option offers policyholders a one-time opportunity to increase monthly payments or reduce them-perhaps to defer more income. Meanwhile, the "Enhanced Income Option" includes a one-time increase in payouts if an interest-rate benchmark is at least two percentage points higher on the policy's fifth anniversary. 

Some insurers allow persons with serious health problems to get special medically underwritten immediate annuities. Because the policyholder's life expectancy is shorter, he or she may qualify for higher payouts.
But there is no free lunch with fixed immediate annuities.

Once the insurance contract is signed, the policy can't be surrendered. However, most of today's fixed immediate annuities will let policyholders withdraw some of the cash. The tradeoff: lower monthly income.

Meanwhile, states nationwide have been making both annuities and sales of investment products to seniors the focus of increased regulation. Florida, for example, last year adopted a law that more than doubled penalties for specified willful unfair or deceptive life insurance and annuity sales practices. The law also requires an insurer or insurance agent to have an objectively reasonable basis for believing that an annuity recommendation to a senior consumer is suitable. Plus, it stiffens penalties for making misleading representations to induce a consumer to cash in funds from a current investment or insurance product to purchase another product.

Not all immediate annuities are alike. So advisors need to shop for the best payouts from the financially strongest issuers. The strongest companies are rated A+ and A++ by A.M. Best.

Randy Spiegelman, financial planner with Charles Schwab, San Francisco, stresses the importance of scrutinizing the annuity payout rate, which may be artificially high.  Financial advisors should seek the rate based on the individual's actuarial life expectancy-not the payout rate based on a client outliving his or her life expectancy.

For example, a male age 65, who invested $300,000 in a single-life immediate annuity would get $24,000 a year or $2,000 per month for as long as he lives. That could translate into an 8% payout rate for life-even if the policyholder lives to be 300 years old. However based on the true 18-year life expectancy of that 65-year-old man, the payout rate is only 4.16%.

Another drawback: Depending on where the client lives, he or she may pay a state premium tax on an annuity.