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8 Questions to Ask About Your Annuity

Filed under: Retirement

Happy senior couple sitting on a bridge in forest, portrait

Annuities can be a valuable part of your retirement plan, depending upon your personal goals. But they can also be confusing, with each type of annuity carrying a different balance of risk and benefit. The most important factor to choosing the right annuity is understanding your choice, so we’ve compiled a list of questions that you should ask before selecting the annuity product that is right for you – or deciding that you want to go in another direction.

What type of annuity am I considering? You are probably considering an annuity because you need to meet a specific need. For example, an immediate annuity contract begins to make payouts right away, while a deferred annuity contract will begin payments at a later date. You need to first decide which type of annuity fits your needs.

Do I understand the contract? As with any type of legal contract, don’t sign up for an annuity until you fully understand every detail of the agreement. Ask questions until you are satisfied.

How much does the annuity cost? You should understand not only the upfront cost of the annuity, but also any other fees that might be associated with it. Does the cost fit your budget? What if you need to withdraw assets earlier than planned? Will you be charged a fee?

Do you need to meet any specific conditions in order to reap full benefits of the annuity? Some annuity contracts only pay out benefits when you meet specific conditions. Make sure you fully understand these conditions and are able to meet them.

What is the performance floor and cap? Your annuity might include a performance floor and cap, which translates to mean that your payments cannot go below and above certain thresholds. Seek to understand the floor and cap, so that you have an idea of what to expect from your annuity.

Do you understand the impact of an annuity on your tax status? Part of retirement planning is analyzing future tax implications of your decisions. How can your annuity help your tax situation?

Will inflation affect your payouts? Inflation is another factor to consider, whether you ultimately choose an annuity or some other way to generate retirement income. Over the course of a ten- or twenty-year retirement, inflation is going to have an impact upon your purchasing power. Inquire whether your annuity payouts are adjusted according to inflation, or make another plan to account for the rise in prices over time.

Can you pass your annuity on to your heirs? Generally speaking, you cannot pass an annuity on to heirs other than your spouse. If you want payments to continue after your death, ensure that you have correctly chosen the right type of annuity and have added your spouse onto the policy.

To further discuss the benefits and drawbacks of various annuity choices, give us a call. We would be happy to address your concerns and help you investigate different retirement income options.