Editor's Note: Retirement-planning in normal times is like home maintenance with a little bit of effort and expense, applied regularly over time, you keep your structure sound. But planning right now is like figuring out what to do after a tornado blows your kitchen and garage into the next county. Despite the market s recent rally, many people s nest egg portfolios remain mangled beyond recognition. In this special report, SmartMoney features advice that can help investors roll up their sleeves and rebuild.

Someone who owns a variable annuity might be tempted right now to say, I told you so. These annuities, a hybrid of an insurance contract and a mutual fund, have attracted an impressive $750 billion in new money over the past five years. Their sales hook: features that give customers a combination of a steady income and a chance to increase that income if the investments do well. Unlike their neighbors, variable-annuity investors haven t had to worry about their income dropping.

Still, the universe for these products is changing in alarming ways. Allan McDonald, a 71-year-old retiree in Ogden, Utah, got a nice income from an annuity he purchased in 2001. But when the former rocket scientist went to purchase a new one last fall, he found that the fees already quite high compared with those of mutual funds and other kinds of annuities were 30 to 50 percent higher. And when McDonald settled on an ING policy, the company stopped offering it before he could invest. McDonald ultimately found an annuity he liked, but he s still getting used to worrying about the industry s financial soundness. Then again, he says, I never would ve imagined Lehman Brothers and Bear Stearns wouldn t have made it.

The market s losses help explain the surprising hikes in fees. To guarantee their benefits to investors, insurance companies use complex hedging strategies; now many investors accounts are underwater, and the cost of those strategies has gone up. In some cases, fees have risen dramatically both for new policyholders and existing ones who want to lock in those payment increases. This winter AXA Equitable raised the fees for one of its annuities 23 percent, while some of PacificLife s fees jumped 59 percent. (AXA says its price is very reasonable, given the income guarantees. PacificLife declined to comment.) Even before the latest blip, fees often topped 3 percent, meaning a policyholder with a $1 million annuity was paying more than $30,000 a year. Those fees come out of investors account balances, making it less likely that their payments will ever grow. And many insurers have seen their financial soundness drop with the credit crisis.

So how does an annuity investor sleep soundly? Thom Hall, the Salt Lake City certified financial planner who helped McDonald, says insurers that survived the recent crash without needing a bailout or slashing services dramatically are probably in a strong position today. (Hall says John Hancock and Prudential are on solid ground.) No U.S. company has ever defaulted on an annuity payment. But investors who want pension-like paychecks without the high fees and potential drama might do better with a simple fixed annuity. And customers who are already in a variable annuity should be cautious about bailing out: You d be selling the underlying investments at a loss, and most products carry surrender charges of as much as 10 percent of assets for those who opt out early.

Read the rest of our special report:

• Stretch Your Nest Egg: Finding the Right Advice
• Stretch Your Nest Egg: Target-Date Fund Facts

  
  

• Stretch Your Nest Egg: The Second Career