What do you do when you've already made the maximum yearly contribution to your 401(k) and/or an IRA? What if you're looking for an alternative all together? If either of those situations describes you, then an annuity might be a retirement savings option worth considering. Annuities are sometimes called "personal pensions," because they pay you a guaranteed income during retirement. But how do they work? And are they right for you?



You put money into an annuity in return for a steady stream of income after you've retired. Keep in mind annuities are primarily retirement savings vehicles and generally require a minimum number of years you must keep your money in the annuity without facing a penalty when withdrawing from it. Early withdrawals also are subject to surrender charges and a 10 percent penalty if withdrawn before age 59?. However, most annuities have some sort of provision that allows you to withdraw 10% of your funds in an emergency.

One of the biggest advantages of annuities lies in taxes. Earnings in an annuity generally offer tax-deferred growth. This is especially helpful if you expect to be in a much lower tax-bracket during retirement.

When you wish to begin collecting payments from your annuity, you simply contact the annuity company, which calculates your monthly payment. The amount of the payment is based on your projected lifespan, the amount in your account and your current age. Payments also may depend upon any other types of provisions that you've opted to include. One provision may stipulate that your payments will continue to a living spouse after your death. You also may choose to include a provision that guarantees payment for a number of years, paying your estate if you die before those years are up. Remember that the more provisions you put into your annuity regarding payments, the less your monthly payments are likely to be due to the additional expense of thse optional riders.

While annuities come in many shapes and sizes, there are two basic categories: immediate and deferred. Immediate annuities are usually associated with a lump sum of money that comes into your possession -- like winning the lottery. While you shouldn't plan on your lucky numbers being drawn any time soon, there are other situations in which an immediate annuity may be best, including receiving an inheritance. You also may choose this option when you reach retirement and decide to put all or most of your previous savings as one lump sum into an immediate annuity.

The alternative choice, which is more widely used, is called a deferred annuity and is used to grow your assets and provide a steady income stream during retirement. During the savings and investing phase, your contributions grow tax-deferred. During the retirement income phase, you choose how you'd like to receive withdrawals: systematic, as you need funds or steady income payments (called annuitizing your contract). You choose to receive these payments for a set period of time or guaranteed for life.

Deferred annuities can be variable or fixed. With a variable deferred annuity, you usually have the opportunity to receive a minimum monthly payment while also receiving extra money gained from investments. Depending on market performance, your extra amount each month may fluctuate, sometimes greatly. Investment return and principal value of an investment in a variable annuity will fluctuate, and your shares, when redeemed, may be worth more or less than their original cost. But if you're looking to make extra money from your investments, even during retirement, while still being guaranteed a monthly payment, a variable annuity might be for you.

If you choose a more conservative approach, a fixed annuity offers the safety of a guaranteed monthly payment, but you miss out on any growth your investment could possibly achieve if it were invested. It is largely considered a "low-risk" investment opportunity. It's also a "low-growth" investment. The safety and any guarantees of an annuity are dependent on the financial strength and claims paying ability of the issuing insurance company, instead of the markets.

Many Americans turn to annuities when they've maxed out their yearly contribution to employer-sponsored plans and their own IRAs. Many others use annuities as their sole retirement investment, especially if they wish to include a death benefit for a spouse. Annuities might not be for everyone, so consult a financial professional, but they are one more option available to help you plan for retirement.