There's something very reassuring about knowing you'll get a regular check in retirement. It used to be that retirees had pensions (defined-benefit plans) that met this need. But with the rise of 401(k) plans and similar types of defined-contribution plans, all guarantees of regular payments are off.

That's why you may want to set up your own "pension"--with a fixed immediate annuity. Here are answers to some common questions about immediate fixed annuities.

What's a Fixed Immediate Annuity?
The "fixed" part of this annuity refers to the fact that the underlying investments are fixed income--or basically bond types of investments. They earn a fixed rate of return.

The "immediate" part of the annuity refers to the fact that in return for a chunk of your money, the annuity will start paying out right away. So it's very different from a deferred annuity, which starts paying out income at some point in the future.

How does a Fixed Annuity Differ from a Variable Annuity?
A fixed annuity pays a fixed rate of interest. A variable annuity lets you choose from a variety of investment alternatives that may include fixed income or stock types of investments. Variable annuities let you put money away today and defer paying tax on the interest until the future.

Variable annuities are usually more expensive than fixed annuities. In addition to the underlying expense ratios of the investment managers, you'll also pay mortality and expense charges. Although these charges vary a lot among insurance carriers, they can be prohibitive.

What Type of Annuity Should You Choose If You Expect to Live a Really Long Time?
With average life spans increasing every year, outliving your assets may be a realistic possibility. A fixed immediate annuity can help address this concern because it starts paying out income right away and you can choose to receive payments over the rest of your lifetime. You can also choose to receive payments made over two lifetimes--usually yours and that of your spouse. That means that even if you live to a very ripe old age (and so does your spouse), the annuity company just keeps paying. You won't run out of money. (So, what's in it for the annuity company, you ask? If you die right after you set up the annuity, they stop making payments then and there.)

True, you can set up an investment strategy that mimics this idea by investing in fixed-income securities. But your income stream can be affected by market gyrations. And even if the market cooperates, you can still run out of money if you calculate distributions based on a certain life expectancy and you live longer than you anticipated. There aren't the same guarantees with this strategy as you would have with a fixed immediate annuity.

A variable annuity also has the ability to deliver an income stream to you over your lifetime. You typically start out putting money away that you don't plan to withdraw until later. When later finally arrives, you "annuitize," and the annuity company takes the balance of your account and figures out what you'll get monthly. Once you make that decision, you're typically not allowed to make changes. The annuitization process locks in payments that can last throughout your lifetime.

You can also structure your variable annuity payouts such that you take periodic distributions and never fully "annuitize." But if you use partial withdrawals, you lose the guarantee of payments for your lifetime.

So How Does a Fixed Immediate Annuity Fit into an Overall Retirement Plan?
When you're thinking about cash flows in retirement, you may want to build in a guaranteed stream of income with a fixed immediate annuity. The costs are reasonable, the payments are secure (assuming you buy from a highly rated insurer), and you don't have to worry about investment results.

But you probably wouldn't put all of your assets into an annuity. In some rare cases--if you were extremely risk averse and only planned to invest in cash or fixed income anyway--it might make sense to purchase an annuity (but be sure to get the inflation-increase feature). The upside in this case would be that you would receive guaranteed lifetime payments. The downside would be that if you die prematurely, your heirs "might" get nothing. (I say "might" because you can choose features with your annuity that guarantee payments for 10 or 20 years, even if you pass away. In that way, these features act like death benefits.)

For most people, a fixed immediate annuity plays a partial role in generating retirement income, and you should supplement it with other investments. Typically, investors might put one third or one fourth of their portfolios in fixed immediate annuities. (Of course, the size of the portfolio also plays a role in how much to annuitize.) Some people like to match up their fixed annuity payouts with their most essential expenses. Then they know those expenses will be covered no matter what.

What Questions Should You Ask When Purchasing a Fixed Immediate Annuity?
1. Based on the lump sum you want to invest, what would your monthly payments be?
There are online tools that can help you do this. Check out Berkshire Hathaway's insurance site or Vanguard. At the Vanguard site, click Vanguard Lifetime Income Program. Either site will let you plug in a lump sum to see what your monthly benefit would be.

2. Are there "term certain" options?
If you're worried that your heirs might not get anything if you buy a fixed immediate annuity and die prematurely, look for a "lifetime annuity with a certain period." That means that your heirs will receive some type of return of principal if you die before 10 years or 20 years have elapsed. Of course, as with any feature, you'll pay more for this privilege. That means the monthly amount you'll get will be somewhat lower.

If you want the guarantee that the annuity will last your lifetime, don't buy an annuity that pays out for a fixed period and then ends. Make sure it lasts a lifetime.

3. Should your annuity cover one life or two?
That's up to you. For most married couples, I'd recommend buying an annuity that will pay income over two lifetimes. Once you've made the decision to have an annuity pay out over two lives, you'll also have to decide if your spouse will get the full amount at your death (100% joint and survivor option) or another percentage (a 50% joint and survivor option is common, but your spouse might not be comfortable with that). If you choose any of these joint and survivor options (over two lives), you'll get a smaller monthly amount than if your annuity only paid out over your life (single life annuity).

4. What is the current fixed rate of return?
The rate of return you earn on an annuity will vary depending on how old you are when you purchase the annuity. (The older you are, the higher the payout because the fund company won't likely have to pay as long.) But on average, fixed annuities are paying roughly 5% right now.

5. What are the costs?
Insurance companies make money on fixed annuities by pocketing the "spread" between what they pay investors (for example, 5%) and what they can earn on that money in the marketplace (for example, 5.2%). So there shouldn't be any expenses per se with a fixed annuity--no M&E charges or underlying investment expenses like you would find on a variable annuity.

6. Does the annuity offer inflation protection?
One of the big criticisms of annuities has always been that they won't increase with inflation. That concern can be addressed now that you can purchase inflation-increase features with your fixed immediate annuities. This is a feature I would definitely recommend.

7. Should you purchase the annuity all at once or over time?
If you're hesitant to purchase a fixed immediate annuity--perhaps you think fixed rates are too low or you aren't entirely comfortable with annuities--you can purchase smaller amounts over time (sort of like dollar-cost averaging). But although you may get higher (or lower) fixed rates from year to year, if life expectancy estimates go up, you may also receive smaller monthly payments.

8. What is the financial strength of the insurer?
There are sites, such as A.M. Best Company's, that rate financial companies. You want to find a company with one of the top ratings.

Bottom line? Fixed immediate annuities aren't for everyone, but they can play a role in helping you make sure your retirement nest egg really does last a lifetime.

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