By Corbis

As the first wave of boomers approaches retirement age, many of them are facing a tough question: How can I draw down savings and investments during my lifetime without running out of money?

Traditional pensions once took care of this problem for many retirees, but those plans are fading from the scene. In the coming years millions of Americans will leave the workplace equipped only with Social Security, a chunk of money and their wits.

Will they be able to cope? Members of Congress, policymakers and even employers are beginning to fear that many will not, and that the nation could awaken a decade or so from now to a generation of retirees who have little to live on. This realization is focusing new attention on a venerable but long-neglected device that can ensure that people do not outlive their money: the annuity.

But what, exactly, is an annuity and how can you figure out if it fits your needs? Strictly speaking, an annuity provides a stream of income over a lifetime or for a specified period of years. A traditional pension is a form of annuity, but the term today generally refers to a contract sold to an individual or a group by an insurance company.

Annuities can be immediate, meaning that the payments begin right away, or they can be deferred, meaning the payments begin sometime in the future. They can be fixed, with an unvarying payment amount, or they can be variable, meaning the payments will depend on the performance of some kind of investment, such as a mutual fund. And they can be bought with one payment, or with a series of payments paid over a period of time. For instance, if you have $100,000 in your 401(k), you could pay either a chunk of it or the entire amount to an insurance company in exchange for a stream of monthly payments.

The annuity attracting new interest among retirees is the immediate fixed annuity—your contracted monthly payments start right away.

The appeal of this type of annuity is that it can turn some or all of your 401(k) or IRA assets into steady, predictable payments that cannot be outlived. In that way, it behaves much like a traditional pension, joining with Social Security to put a lifetime floor under a retiree's income.

Such products, however, remain a tough sell. Many financial planners argue that skillful management of your nest egg is a better way to protect your assets for yourself and your heirs and that the returns on annuities are not worth tying up a lot of money. And retirees themselves, or those planning ahead, can easily come up with a daunting list of "what-ifs." For example:

• What if I die soon? Typically, payments from a life annuity end when a person dies. Thus, a premature death could mean that you don't get back all the money you paid in. Of course, the flip side of this is that if you live long, you end up a winner, getting back more than you put in.
• What about my heirs? Since most annuities end with the death of the contract holder, your heirs would get nothing. Some economists call this a reasonable tradeoff for the security provided by an annuity, but you may not see it that way.
• What about inflation? Any stream of fixed payments loses value over time as inflation reduces the dollar's buying power. This means that while you won't outlive your money, payments that always remain at the same dollar amount become effectively lower over a period of years.
• What if I have an unexpected expense, such as a big hospital bill? Access to your money—what economists call liquidity—can be a problem, especially if you have few resources outside the annuity.

To meet such concerns, insurers are tinkering with their products and have come up with special features. Annuities are now available that will:

• continue payments to your surviving spouse for his or her lifetime;
• guarantee payments for a fixed number of years to your heirs if you die prematurely;
• adjust payments for inflation; and
• allow you to tap the annuity for unexpected expenses, such as medical bills.

However, these features typically make the contract more expensive. For example, in Maryland a $100,000 annuity might pay $705 a month to a 65-year-old man with no survivor benefits, but $675 if payments were contracted to continue for at least 10 years, even if he died sooner.

Age also affects the payment: A $100,000 immediate annuity at current rates would pay a 65-year-old man about $700 a month for life; it would pay an 80-year-old man around $1,000.

Interest rates are also a major factor. Former Assistant Treasury Secretary Mark J. Warshawsky, now a benefits consultant at Watson Wyatt Worldwide, recently figured a $100,000 premium would have bought an immediate annuity paying $1,141 a month for a couple, both 65, back in 1983 when rates were very high, but by last May it would have paid only $584.

Even in today's relatively stable interest markets, the size of the monthly payment you can buy with a given sum still bobs up and down. The payment set at the start is crucial, Warshawsky says. "Once you've locked in, it follows you for the rest of your life."

Such issues, including the what-ifs and the added costs for features that address them, may explain why immediate annuities are less than 5 percent of the more than $200 billion worth of annuities sold annually. The rest are deferred annuities, which are widely marketed as tax shelters, and appeal more to workers seeking to reduce their taxes than to retirees seeking guaranteed income.

The financial industry is trying to broaden the appeal of immediate annuities, emphasizing the income security they provide. Many firms post information, including costs, on their websites. Quotes are also available at other online sites, such as AnnuityShopper. (For information, visit the new AARP Lifetime Income Program from New York Life.)

Some members of Congress are pitching in, too, offering tax incentives to encourage retirees to put at least some of their nest egg into an annuity. Several bills failed last year that would have made a portion of annuity income tax-free, but backers hope to move them forward this year.

Albert B. Crenshaw wrote for the Washington Post business section for 24 years.