A fresh look at annuities

May 6, 2013, 12:36 PM UTC
Illustration: Ava Vazquez

Harold Evensky, a prominent financial planner based in Coral Gables, Fla., once proclaimed that he would wash his mouth out with soap if he so much as uttered the word “annuities.” Lately Evensky has shocked even himself by changing his tune. “Now I think they are going to be a best investment,” he says with a laugh. “I’ve got insurance friends who still remind me that I had been so pompous about never touching them.”

The reason for the change of heart is simple: Retirees are being squeezed by low interest rates, volatile markets, and increased life expectancy. The prospect of running out of money is terrifying even for good savers.

The most basic notion of an annuity — transforming today’s savings into a steady, long-term income stream, like Social Security or a pension — has always had appeal. But historically many people steered clear, wanting to avoid the high fees, complexity, and restrictions on removing money that made many retail annuities a poor choice. “What was offered a few years ago was unconscionably bad,” Evensky says. But that, too, has been changing.

Evensky is talking about income annuities, whether immediate or deferred, not about variable annuities, which include an investment account and are more common. With immediate annuities, the payout starts more or less instantly. They are best for the already retired, and Evensky argues there’s no need for one till around age 70. The longer you wait to buy an immediate annuity, the higher your payout will be. The other reason to delay if you can: When interest rates are down, as today, annuities are more expensive; they’ll get cheaper after rates rise.

With a deferred-income annuity — often dubbed “longevity insurance” — you pay the premium now and set the payout for 10 or more years away. You might buy longevity insurance at age 65 that starts to pay out at 85, using 10% to 15% of your portfolio. That creates spending benefits for the typical retiree comparable to a 60% allocation to an immediate annuity, according to research by Jason Scott of the retiree research center at Financial Engines.

Here’s how the numbers work at recent rates, courtesy of New York Life. A 65-year-old man who invests $100,000 in an immediate annuity today would get an annual payout of $6,120. That same man who defers the payout until age 85 would receive $60,440 a year. A 55-year-old man who chooses to start payouts at 65 would receive $10,620.

Deferred-income annuities have become a “personal pension,” says Matthew Grove, a senior managing director at New York Life, which has sold more than $1 billion of its version since launching it in 2011. They’ve also gotten more painless to buy. Vanguard, Schwab, Fidelity, and others now offer annuities from multiple providers (with websites that make them easy to compare), eliminating the need to endure a sales pitch from an insurance broker.

Should you buy an annuity? Probably not if you’re super-wealthy or strapped for cash (and thus want instant access to every penny). But for many in between those extremes, there are benefits. Does the 70-year-old Evensky plan to annuitize part of his own portfolio? “Very possibly yes,” he says. “Knock wood, I come from a long-lived family.”

This story is from the May 20, 2013 issue of Fortune.