Questions to Ask Before Buying an Annuity

When you think about retirement, one of the biggest concerns is making sure your money lasts as long as you do. That’s where annuities can play a valuable role. They are designed to provide a reliable stream of income in retirement, often for life, which can bring peace of mind. But annuities are not one-size-fits-all, and before making a decision, it’s important to ask the right questions.

Here are key questions to consider before buying an annuity.

1. What Problem Am I Trying to Solve?

The first question to ask is why you’re considering an annuity in the first place. Do you want guaranteed lifetime income? Protection from market volatility? A way to leave money to a spouse? Knowing your goal will help determine the type of annuity that fits best. For example, if you’re worried about running out of money, an immediate or lifetime income annuity might make sense. If you want growth with some downside protection, a fixed indexed annuity could be the better choice.

2. What Type of Annuity Am I Looking At?

There are several kinds of annuities, each with different features:

• Fixed annuities offer predictable interest rates and guaranteed payments.

• Variable annuities allow investments in the market and can grow with it, but they carry risk.

• Indexed annuities tie growth to a market index but include protection against losses.

It’s essential to understand which type you’re considering, what it offers, and how it fits into your overall retirement income strategy.

3. What Are the Fees and Expenses?

Annuities often come with costs, such as mortality and expense charges, rider fees, or investment management fees (for variable annuities). Some of these charges can reduce your returns over time. Be sure to ask for a clear explanation of all fees involved so you can compare your options accurately.

4. How Long Will My Money Be Tied Up?

Annuities typically come with surrender periods, which means if you need to withdraw more than the allowed amount during that time, you may face penalties. Ask about the length of the surrender period, the penalty rates, and what flexibility you have if your financial needs change.

5. What Happens If I Need My Money Early?

Life is unpredictable. If you suddenly need funds for a medical emergency or another large expense, will the annuity allow for early withdrawals without harsh penalties? Many contracts allow a certain percentage of the account to be withdrawn annually without charges, but it’s important to know the details.

6. How Will the Annuity Pay Me?

Some annuities provide income for a set number of years, while others guarantee payments for life. Be clear about how payments are structured and whether you can customize them to meet your needs. Also ask whether payments continue to a surviving spouse, and if so, at what level.

7. How Is the Insurance Company Rated?

Because annuities are backed by insurance companies, their strength and stability matter. Look for insurers with strong financial ratings from agencies like AM Best, Moody’s, or Standard & Poor’s. A retirement planner can help you evaluate the reliability of different providers.

8. What Role Does This Annuity Play in My Overall Plan?

An annuity should not be purchased in isolation. It should be part of a broader retirement income strategy that considers Social Security, pensions, investment accounts, and potential healthcare needs. Ask yourself (and your retirement planner): how does this product help balance income, growth, and protection across my retirement plan?

9. Are There Optional Riders I Should Consider?

Many annuities offer add-ons called riders, such as guaranteed lifetime withdrawal benefits, enhanced death benefits, or long-term care features. While these can provide valuable protection, they usually come at an additional cost. Ask whether these riders align with your priorities before adding them.

10. What Are the Tax Implications?

Earnings within an annuity grow tax-deferred, but withdrawals are taxed as ordinary income. Depending on your tax bracket in retirement, this may or may not be advantageous. Ask how withdrawals could affect your taxes and how an annuity fits alongside other tax-efficient investments.

Final Thoughts

Annuities can be a powerful tool for creating retirement security, but they aren’t for everyone. Asking the right questions ensures you understand what you’re buying, how it works, and how it serves your long-term goals.

At Sound Retirement Solutions, we help retirees explore whether an annuity is the right fit for their income strategy. Schedule a conversation with one of our retirement planners today, and let us help you find the peace of mind that comes with knowing your income is protected.