Dear Readers,
If you have funds sitting in a money market account earning next to nothing because you’re concerned about where the stock market is headed, don’t feel like the Lone Ranger.

On the other hand, what if the market takes off (as it recently showed it can do) and you’re left eating Tonto's dust? Should you take the plunge and make the investment or sit tight and run the risk of missing out on the next bull market?

What if you didn’t have to choose?

With a variable annuity (VA), you can invest in accounts managed in the same style as mutual funds, but with a twist: for an additional fee, you can essentially insure your return. Depending on the details of the annuity product you select, you can receive either the actual return your investments earn or a guaranteed minimum of, say, 5% — whichever is greater. Frankly, this is almost too good to be true in today’s market.

With a variable annuity you should be able to earn at least the same rate you’d get by locking up your money in a 5-year certificate of deposit. In other words, some of the added features of a variable annuity have the potential to offer you all of the upside — and none of the downside — of being in the stock market. Of course, whether or not a variable annuity is appropriate for you and your investment goals should be considered before making any investment decisions.

Variable annuities were created by Congress years ago as retirement savings vehicles, so there’s a penalty if you take the money out before you reach age 59-1/2. Because the investments are bundled with a life insurance policy, they grow tax-deferred. No tax is paid until you start to withdraw the money. At that point all of the earnings are taxed at your ordinary income tax rate. The life insurance "wrapper" ensures that your heirs will receive a benefit upon your death.

I don’t know about you, but I’m more interested in what an investment can do for me as opposed to my heirs. In recognition of this, more modern VAs have added options appropriately called, "living benefits," which the owner can take advantage of while he or she is alive. The guaranteed minimum return is one example. You may also find annuities with provisions for nursing home expenses.

Naturally, these options will cost more. But remember, you’re getting more benefits. Three years ago people scoffed at the idea that the market might fail to provide a 5% return. "Why in heavens name do you need a guarantee?" they asked. Well, based on what we’ve been through in the past two years, I find comfort in the idea of a minimum return that is guaranteed, regardless of what the stock market does.

VAs take a lot of heat regarding expenses. The argument goes that since a variable annuity essentially consists of accounts managed in the same style as mutual funds inside a life insurance wrapper, it’s cheaper to buy each separately. Unfortunately, this perspective obscures the big advantage VAs have over mutual funds: the ability to "annuitize" your account and convert it to a stream of income (monthly, quarterly, semi-annually, annually) that you cannot outlive. (All guarantees are based on the claims-paying ability of the insurer.)

Social Security is essentially a government-sponsored annuity. TIAA-CREF is the largest pension provider in the world. Guess what the "TIAA" part of a retiree’s benefit is? Yep, it’s an annuity.

A few years back a study by the accounting firm PricewaterhouseCoopers shot a bunch of holes into the "VAs cost more" argument. Variable annuities have slightly higher annual fees for a period of time — generally 5 or 7 years. If you withdraw principal prior to that time you are charged a fee, which declines as you get closer to the end of the holding period.

According to Mark Mackey, president and CEO of the National Association for Variable Annuities, this study concluded that, on average, expenses in B-share mutual funds and non-qualified VAs (the kind you set up yourself and not those not inside a company retirement plan) are almost identical. And with a VA you can (for an additional fee) get life insurance protection for your heirs, the option of a minimum guaranteed return and — let me say this again — the ability to annuitize the contract.

Now a new study by PricewaterhouseCoopers finds that, on an after-tax basis, you actually receive substantially more income if you annuitize a VA compared to making periodic withdrawals from a mutual fund.

Here’s an example. Let’s say you’re male, 65 years old, in the 28% tax bracket and have $50,000. You’ve got a choice of investing that amount in either a variable annuity or a back-end loaded mutual fund earning the same return. Let’s assume your grandfather lived to age 90 and your mother is still healthy at age 88. Your biggest concern is not dying too soon, but living too long and outlasting your money.

According to Social Security, you have a 5% chance of reaching age 95. If you purchase a variable annuity, you’re shifting the risk of a longer-than-average life onto the insurance company. It’s up to them to figure out how they’re going to pay you for as long as you live. On the other hand, if you invest the money in the mutual fund, you bear all the risk. You have to figure out how much you can safely withdraw each year. And let’s hope you don’t run into two down years like we’ve just been through in the stock market!

PricewaterhouseCoopers concluded that on an after-tax basis, the annuity would pay you almost twice as much income as you could safely withdraw from your mutual fund.

How is this possible? Actually, it’s pretty simple. In trying to guess how long you’ll live, you’re rolling the dice on one life — yours. And you’re hoping you’re right. If you die sooner than age 95, you lose because you could have taken larger amounts out of your mutual fund. On the other hand, if you live beyond age 95, you also lose because your account has run out of money!

In contrast, the insurance company only has to be correct on average. It’s dealing with tens of thousands of people. And it knows that, on average, a 65-year old male will live to age 81. That means half will die before that. So the insurance company is off the hook in terms of paying income to those folks. It also knows only 5% will reach age 95 — a very small number out of the total. It can afford to pay them years of additional income because of those who died earlier than expected.

In Mackey’s words, "A lifetime annuity provides real value to investors who want to ensure they have income for as long as they live."

Think of it as a way to turn some of your assets into one of those quaint, lifetime pensions your parents had. In light of the past two years, this doesn’t sound like such an old-fashioned idea after all.

Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to moneymatters@foxnews.com  along with your name and phone number.

To access Gail's past columns, simply use our new "Search" function: type in "Buckner" and you'll be able to get all Your $ Matters columns since April 2001.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.