7 tips to avoid annuity headaches / The potential problem of running out of money during retirement is a real one. This concern brings with it a tremendous amount of anxiety and worry.

Melody Juge for MarketWatch.com writes:  If planned properly, the right annuity product selection can provide an income that cannot be outlived, thus making for a more emotionally comfortable retirement by taking the worry and concern out of running out of money in your lifetime.

Be cautious, however, while exploring the possible use of income annuities to fund your fixed-income and lifestyle-income requirements during retirement; the wrong choice can be unforgiving.

7 tips to stay out of annuity trouble:

1. Recognize trade-offs

If you are thinking about purchasing an income annuity, the money has to come from somewhere. Be sure that you explore and understand all aspects of the trade-off you will be making if you are moving money from your CDs, 401(k)s, IRAs and other investments into an annuity and that making the switch is in your best interest.

2. Understand the contract

There are many moving parts within an income annuity contract: caps, participation rates, guarantee rates, the offering of various riders such as cost of living adjustment, nursing home, accelerated death benefit and the charges associated with them plus many more contractual restrictions.

Here are some particularly complicated areas in an annuity contract that can be difficult to comprehend that you need to be aware of and thoroughly understand before signing on the dotted line: Length and amount of surrender charges, fine print of the monthly/annual percentage that will be paid to you during the receiving of income — the exact percentage and how it is calculated and all the details of what happens if you stop the flow or want to postpone receiving income once you have started to collect. Also be sure to check if penalty free withdrawals are allowed, if so what percentage and how often.

Most annuity contracts are extremely cumbersome with a great deal of legal language. Moreover, many of the insurance salespeople who sell annuities have never read an annuity contract nor do they understand the products they are offering to you. Be careful who you choose to work with.

3. Consider smaller contracts

In today's annuity market placing a large sum of money in one annuity contract may not be the best choice. Why? You will have more flexibility if you request smaller contracts.

Here is an example: Let's say you have purchased an annuity with a premium of $200,000. Request two $100,000 contracts. This request has to be done prior to the contract being issued. However, if you have just purchased an annuity that is within its 15-to-30-day free look period, then you can send the contract back and request that it be reissued in smaller increments.

When it comes time to turn on your income benefit you can turn on both annuity contracts for the full amount you originally planned for or if your circumstances have changed you may choose to delay starting the income flow from the second contract. This suggestion will help aid in the quest for maximum flexibility in manipulating your contracts to give you more control over your money.

4. Don’t forget your emergency fund

Be very careful about how much of your investment dollars you are allotting to an annuity and be certain you have explored and thought through all the reasons why you are making this purchase.

I continue to read and hear horror stories about people who are disgruntled because they placed ALL their 401(k) or IRA money in an annuity and then their situation changed and they needed something different from what they originally purchased. They feel stuck with what they have. Well, they are stuck.

Although retirement income requirements are evaluated on a case-by-case basis generally speaking, it is important to have cash on hand as well as investible assets that are structured for growth. Ultimately this strategy may help you in a severe inflationary environment. And, of course, it is very important to have an emergency fund. Emergency funds should be held in cash, after all they are set asides for an emergency.

5. Annuities can be treacherous

There is a big difference between annuities being sold for all the “bells and whistles” that are promised or annuities that have been carefully chosen and are placed in a portfolio to fund a specific need for a specific period where some of the bells and whistles actually turn into usable features and benefits.

Here are a couple of examples of annuity usage:

A.) You may need guaranteed supplemental income for a few years to tide you over until you can collect your maximum Social Security benefit. To avoid having to pull money out of an investment account at the wrong time to supplement your income during a wildly fluctuating market, you may find that it makes more sense to purchase a five to seven-year income annuity to tide you over.

B.) Your particular circumstances may require additional monthly life income to supplement your social security benefit and/or pension. Review what makes sense for you as it relates to your income needs as well as the potential growth of your portfolio.

6. Work with a pro

Be sure you are working with someone who is licensed and experienced not only in annuities, which are insurance products, but also in general investments, which are securities products which require different licensing.

In addition, the monthly income that you may be counting on from an annuity is only as good as the financial strength of the insurance company you are receiving it from. Be aware of the ratings of the insurance carrier you are considering. Check with the Insurance Guaranty Corporation in the state where you are purchasing the annuity.

The Guaranty Corporation is a not-for-profit corporation whose members consist of all life insurance companies licensed to do business in a particular state. In the event that a member insurer is found to be insolvent and is ordered to be liquidated by a court, the Guaranty Corporation provides protection to the policyholders of that member up to certain limits set by the state.

7. Don’t get caught up in the hype

Annuities are either thoughtfully placed in an investment portfolio for a specific purpose or they are simply sold. The dinner seminar is a good example of being in a hyped environment, getting caught in the whirlwind of “fabulous annuity benefits and hearing the angels sing” and then finding out sometime later, well after you made your purchase, that you made the wrong decision for all the wrong reasons for your long-term situation.

This product category definitely offers some outstanding features and benefits and a variety of uses to supplement retirement income and to create life income and may be an excellent choice for some people.

Nonetheless, annuities are not right for everyone.