NEW YORK (MainStreet) -- Psst! How would you like to earn 7% on your retirement funds, risk free?

With most fixed-income investments earning less than half that amount, and bank savings even stingier, 7% sounds terrific. Stocks might do better over the long run, but with a lot of risk.

These high-looking yields come from immediate annuities, insurance products that can convert a lump-sum cash payment into a steady income guaranteed for life. Immediate annuities are getting a good deal of attention as baby boomers look for a way to mimic what their parents received through traditional pensions.

A recent report by the non-partisan Government Accountability Office joined the chorus: “Financial experts GAO interviewed typically recommended that retirees systematically draw down their savings and convert a portion of their savings into an income annuity to cover necessary expenses, or opt for the annuity provided by an employer-sponsored [defined benefit] pension instead of a lump sum withdrawal.”

Annuities are a possible remedy to the dreaded problem of “outliving your money”, but there are some serious catches.

In addition to high fees, the immediate annuity is typically an irreversible decision. The money you pay upfront is gone. If you die too soon, the income could be far less than you had paid. Some policy add-ons can remedy this, but they reduce the income stream.

Today, a 60-year-old man could receive $578 a month for a $100,000 premium, according to ImmediateAnnuities.com. That’s $6,936 a month, just shy of 7% of the premium. But a large chunk of that is actually a return of the policy holder’s principal.

If the policy holder were to live for 20 years, he would in effect receive $5,000 a year as a return of principal, leaving investment earnings of just $1,936 a year, or just under 2%. Of course, if he lived for 40 years he’d get just $2,500 a year in principal, boosting the earnings to $4,436, or about 4.4% a year.

Of course, there is real value in knowing the money will keep flowing, though inflation will of course chew into the buying power of any fixed monthly payment.

Most experts who advocate immediate annuities suggest that they make up just part of the retiree’s assets, to round out a portfolio which should also include stocks, bonds, cash and Social Security benefits.

Also, people who won’t retire for a few years might consider waiting to buy an annuity, as payouts could become more generous if interest rates rise. Insurers base the payouts on their projected returns from investing the premiums, and these payouts are especially low today.

Waiting can also increase the monthly income, since the policy holder will not receive as many payments overall. A 66-year-old man spending $100,000 could receive $7,872 a year instead of the $6,936 if he’d started taking disbursements at 60.

If an annuity seems right for your future, think about building up the premium payment over time, to avoid having to raise money for the annuity by selling other investments, such as stocks, in a downturn.

Because they are safe, bank savings are a good option for money destined for an annuity premium. A laddered portfolio of certificates of deposit would produce a good balance between the highest possible yield and flexibility.

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