An annuity conversation can become detailed quickly. Before comparing numbers or illustrations, start with the role the money needs to play in your retirement.

An annuity is a contract with an insurance company. Depending on its terms, it can provide income beginning soon or at a future date. Features, costs and restrictions vary, so understanding the particular contract matters.[1]

These six questions can help you prepare for a clearer conversation and identify what needs a closer look before you make a decision.

1. What retirement need would this annuity address?

Give the money a specific job. Are you exploring income for essential bills, planning for a later stage of retirement, or looking at a concern that needs a different solution?

Start with your expected spending and income from Social Security, pensions and other sources. Victoria’s article on estimating your retirement income gap offers a starting point for that exercise.

Write down the question you want answered: “How would this contract help with this particular need?” Ask what alternatives were considered and why this approach was proposed for your circumstances. California’s Department of Insurance emphasizes reviewing an annuity in the context of your finances and goals.[2]

2. When would income begin, and how would it work?

Choose the time frame you want to discuss: income now, income several years from now, or flexibility while your retirement plans become clearer.

Then ask how the proposed payments would actually be produced. Turning contract value into a stream of payments and taking withdrawals through an optional income benefit can involve different rules and different access to the remaining money.[3]

Questions to bring to the conversation include:

  • When could payments start?
  • Would they last for a set period or for life?
  • Would payments continue for a spouse?
  • What could change the amount received?
  • Which decisions could be changed later?

Ask for the relevant contract provisions, along with a plain language explanation.

3. How much access to your savings would you need?

Look beyond the monthly budget. A home repair, family need or change in health can create an expense that arrives all at once.

The California Department of Insurance advises considering whether you would have enough accessible money for emergencies after an annuity purchase.[2] Make a separate list of upcoming expenses and the funds you expect to use for them.

For the proposed contract, ask: “What would happen if I needed to take out more money than planned?” Request an explanation of any withdrawal limits, charges and effect on future benefits.

The companion article on planning for unexpected retirement expenses can help you prepare that list.

4. What would the costs and restrictions be?

Costs differ across annuities. Depending on the contract, there may be ongoing charges, charges for optional benefits, or surrender charges for taking money out during a specified period. Some contracts have no explicit ongoing fee, but still include restrictions on withdrawals or how earnings are credited.[1]

Ask for a written explanation of:

  • The surrender period and applicable charges.
  • Any withdrawals permitted without a surrender charge.
  • The cost of each optional feature.
  • How withdrawals could affect income benefits.
  • How the person recommending the contract is compensated.

If you already own an annuity, ask for a comparison of keeping it and replacing it, including existing benefits you would lose and any new surrender period.[1]

5. What is guaranteed, and who stands behind it?

Ask which amounts are guaranteed and which are illustrated. Illustrations rely on assumptions, and the figures shown are not all promises.[3]

For each guarantee, ask which conditions apply. What happens if income starts earlier or withdrawals exceed a limit? What would beneficiaries receive under the payment option being considered?

Annuity guarantees depend on the issuing insurance company’s financial strength and ability to pay claims.[3] Ask how to research that company and locate each promise in the contract.

6. How would it fit with the rest of your retirement plan?

Place the proposal beside your other income sources, accessible savings and household obligations. Does it address the need you identified in the first question? What money would remain available for changing expenses? How would you plan for rising costs over time?

Include tax questions in the review. Tax treatment depends on the type of account, how the annuity is funded and how money is distributed.[4] An annuity inside a traditional IRA or 401(k) does not provide an additional layer of tax deferral.[1]

Ask a qualified tax professional to explain the implications for your circumstances before a purchase, withdrawal or replacement. Tax aware planning includes knowing which questions require that separate expertise.

Prepare for the conversation

Bring an estimate of household spending, a list of expected retirement income, upcoming expenses and statements for any annuities you already own. Write down what you need the money to accomplish and which questions remain unanswered.

You can book a 30 minute Learn More conversation with Victoria to discuss your retirement questions. Meetings must be booked ahead.

Victoria Alden is a Retirement Specialist with Wilshire Group Financial Services in Los Angeles.

For general education only. This article does not provide individualized investment, tax or legal advice or recommend a particular insurance product. Annuity features, costs and availability vary by contract and state. A purchase or replacement requires a review of your circumstances and the applicable contract terms.

Sources

  1. Investor.gov: Annuities, U.S. Securities and Exchange Commission.
  2. Annuities: What Seniors Need to Know, California Department of Insurance.
  3. Buyer’s Guide for Deferred Annuities, National Association of Insurance Commissioners.
  4. Publication 575: Pension and Annuity Income, Internal Revenue Service.