Choices are proliferating, and investors want guaranteed income.

When it comes to annuities there is good and bad news to report.

The good news is that insurers and annuity companies are creating some of the most flexible and interesting products the industry has ever produced.

The bad news is that the rates and returns companies are paying are at record lows and going lower, as insurers petition state insurance regulators to allow them to decrease the guaranteed floors on their fixed annuity accounts. Many companies have gone so far as to pull their fixed products and even the fixed baskets in their variable products. Alternately, variable annuities in and of themselves can be as much a crap shoot as the stock market, since they provide only a little short-term comfort to investors seeking shelter from the stock market storm. For those entering retirement right now, immediate annuities can be a scary proposition since buying them means locking in at relatively low rates, with no chance of cashing out or transferring money elsewhere when rates rise.

Not surprisingly, none of this has stopped investors or advisors from taking a good, long look at annuities. The reason is simple: Investors moving closer to retirement are determined to guarantee some portion of their retirement income in the midst of what has turned into a very frightening bear market that, in many cases, has taken a big bite out of their retirement accounts.

Fear, pent-up frustration with ongoing stock market losses and the uncertain financial future those losses have created are encouraging all types of investors, including the very wealthy, to seek guarantees for retirement.

That's reflected in a notable uptick in new annuity sales after years of declining net cash flows, says Dan Beatrice, the project manager of the annual annuity sales survey at the Connecticut-based Life Insurance and Marketing Research Association. Overall sales increased 20% in the fourth quarter of 2002, while sales of fixed annuities increased 40% and variable sales increased 7%. Fixed immediate sales increased 39%, in contrast to fixed variable sales, which dropped 19%.

Advisors, even those who had the luxury of viewing annuities as expensive and unnecessary in the long-running bull market, are now taking a hard look at the contracts. They realize that clients in retirement not only want, but have begun to demand, some level of certain retirement income "I think the industry overall is starting to see this as a liability issue and is asking: 'What have I done to insure that my clients don't outlive their money?' says Paula Hogan, president of the fee-only firm of Hogan Financial Management in Milwaukee. "One way to do this is annuitization."

Other planners say they, like clients and even the insurers who have to invest to make annuities payments, find themselves between a rock and hard place because of the markets. "We're in a position now where we're not getting returns from the bond market and not getting them from the stock market, at the same time it's absolutely crucial that we ensure that clients have the income they need," says John W. Ueleke, president of Legacy Wealth Managers in Memphis. "By and large our retired clients are weathering the downturn fairly well because they receive pensions and Social Security. It's the people without pensions who will be at the greatest risk going forward."

That demand is certain to grow as the baby boomers begin their retirement stampede, the majority of them with eroding nest eggs and without determinate pension distributions. It's cast a big light on annuities at the same time it's meant a dose of realism for investors. "We're seeing the same things as advisors are," says Linda Lanam, vice president of annuities at the American Council of Life Insurers in Washington, D.C. "In some cases people are planning to work longer. In other cases, people are choosing to annuitize now, figuring that if rates stay low, they might as well get some income now. Others are delaying hoping rates and the economy will turn around. Still others, though further and fewer between, are bullish on the market so they're buying variable annuities."

What's important, she says, is that insurers, advisors and investors have begun to think not just about asset accumulation, but lifetime income and ways to preserve and direct income in retirement. Annuitization is one of the few ways to do that. "We would never recommend that people put all of their assets in annuities," Lanam says, "but as a piece of the portfolio, annuities can become self-created pensions and serve to establish a floor that allows investors to take calculated risks with the rest of their portfolios."

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