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When it comes to retirement, there are a lot of gray areas that not many people understand. It is a complicated territory to traverse if you are not accustomed to the policies and terminology, which many individuals aren’t.

For those who are about to retire, or for those who are getting a head start on their own retirement planning, there are a few questions you should ask about annuities to get a better understanding for your own benefit.

1. What is an annuity?

You pay an insurance company an agreed upon amount of money. In turn, the insurance company will distribute money back to you in monthly increments of a set amount. The timeframe of these payments is completely up to you. Either they can start immediately, or you can have them start on a certain date in the future. One benefit of annuities is that they provide you with stable income either for life, or for as long as you wish.

2. Can annuity payments fluctuate?

If you have a fixed annuity, you set the amount that you want paid out to you and that number won’t change for the duration of your annuity. If you want the amount to have the possibility of increasing, you can chose a variable or indexed annuity. These payments can increase depending on how the stock market is performing, but, as a result, they typically require higher fees than a fixed annuity does.

3. What happens to my annuity when I die?

Some retirees choose to receive payments until the end of their lives, but many wonder what happens to the money in instances where someone passes away earlier than anticipated and has only received a few payments before their death. You can, for example, request that payments persist after your death and are made, instead, to your spouse for the remainder of their life. Annuities can have several different options such as a death benefit, continuation of payment, or, if you annuitized typically, the payment simply ends. Be sure to inform yourself.

4. Can annuities affect my taxes?

One perk of annuities is that you don’t have to worry so much about taxes after retirement. You can use money from your 401(k) or IRA account to purchase an annuity, which means that you will only be taxed on the payments that you receive.

5. Will payments rise as interest rates increase?

Today, annuities don’t pay out as much as they used to in previous years. But as interest rates continue to rise, it is expected that annuity payments will rise too.

Now that you know a little more about annuities, would you consider using one when you retire?

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