When guarding your investment is key: Nita Swinton turned to a principal-protected annuity to guard against market losses.

Nita Swinton has found a way to lessen the sting when the stock market declines. A few years ago, Swinton became alarmed when her retirement investments began to decline sharply. The married mother of twin girls was holding some losers in her stock portfolio. She purchased Lucent at $25 and it dropped as low as $3.

"I was losing money like crazy," says Swinton, a claims representative for an insurance company in Warren, New Jersey, who lost nearly $20,000 in the stock market before switching to a principal-protected variable annuity. Her husband, Stephen, owns a graphic design company. "I was sold on this investment as soon as I found out that my initial investment was protected no matter what." she says.

Traditionally, annuities have been fixed-rate investments that guarantee a minimum return--usually 3%--or minimum monthly payment upon retirement. Recently, firms have been offering variable annuities, which have rates of return that fluctuate with the market. The downside to this is that the amount invested in the annuity declines when the stock market declines. Principal-protected annuities eliminate the risks typically associated with variable annuities. This is best for investors like Swinton who can't bear to lose any of their out-of-pocket investment.

Swinton has recently begun working with Tamara Haskins, a financial adviser at Merrill Lynch in Edison, New Jersey. "I recommended a Pacific Life principal-protected annuity for Nita because I knew she was planning for retirement and had lost a lot of money, which made her very adverse to risk," says Haskins. "The main benefit to this annuity is that you won't lose your original investment. The underlying investment of the annuity is still a mutual fund, but if you buy a mutual fund outside of an annuity, you are subject to the volatility of the market. That is not the case with this annuity."

Annuities are offered by life insurance companies but operate as retirement accounts. Like other retirement accounts, withdrawals and other distributions taken prior to age 59 1/2 are subject to a 10% federal tax penalty.

In addition to offering a safe haven for initial investments, principal-protected annuities may also allow investors to lock in their gains. The Pacific Life annuity that Swinton has allows her to increase her protected amount after a year. She funded her annuity earlier this year with nearly $50,000, and next year she can increase her protected amount to whatever the potentially higher balance is at that time. There are principal-protected annuities with three- and five-year terms as well.

Swinton was also sold on the 4% bonus she received for opening the account and is looking forward to a 6% annual credit that Pacific Life offers on her annuity product.

In order to offer these bonuses and guarantees, insurance companies charge higher fees than typical brokerage accounts. Annual fees and premium costs may range from 1% to 3% of the full value of the account. The typical holding period for annuities is seven years. Withdrawing money early will incur surrender charges. Haskins likens a principal-protected annuity to having an insurance policy on a mutual fund. "In order to get these guarantees, you're basically buying insurance," she explains.

Swinton isn't deterred by the fees. Prior to investing in the principal-protected annuity, her funds were in a nonqualified stock brokerage account, and she says the fees and losses from that account were unbearable. Now that she has peace of mind about her retirement account, she is focusing on college savings accounts for her 10-year-old daughters Nakia and Erica.