Decoding annuities

ALEX ROCA: Hello. And thank you for joining Women Talk Money. My name is Alex Roca, and I will be your host for today's conversation. We're here to help demystify annuities. This is a topic that we get asked about a lot. And that's because they're often misunderstood.

 

But the truth is, annuities can be an impactful tool when it comes to planning for retirement and saving for the future, and they're often underused. We're going to break things down in a simple and straightforward way to show you how annuities could play a valuable role in a well-rounded plan.

 

With me today are two Fidelity panelists. First, Gina Gillespie is a vice president and financial consultant. She works with clients every day to help them create and maintain their financial plans.

 

And we have Stefne Lynch. She's a Vice President of Annuity Product Management and Client Engagement at Fidelity Insurance Agency. She and her teams help people learn about, choose, and make the most of their insurance solutions to protect their finances and enjoy retirement with confidence. We are so glad to have you both here with us today.

 

Now, let's dive in. We're going to do a bit of myth-busting today. We're here today to talk about annuities, which we all know can feel a bit overwhelming when you first hear about them. So Stefne, can you start us off by explaining what an annuity is?

 

STEFNE LYNCH: Sure. So at its most basic level, an annuity is a contract with an insurance company that shifts some of the risk away from you and on to the insurance company. And the way you take advantage of this is you can either make a lump sum payment into the contract or a series of payments. And you can get income either now or in the future.

 

Depending on the type of annuity, they can be creating your own pension-like stream of income, or they can grow tax deferred similar to a CD while you earn interest. And you can take some of your savings and turn it into lifetime income when you're ready. So they're very, very flexible in terms of your retirement income plans.

 

And annuities have different benefits depending on the type that you choose. They can help you address the risk of market volatility or inflation or the possibility that you can outlive your money.

 

ALEX ROCA: Absolutely. And Gina, you help clients with their planning every day. When do annuities tend to come up in the planning conversations? And how do your clients react to them?

 

GINA GILLESPIE: So I talk about annuities with clients all the time. And not because annuity is right for everybody, not because it's a one size fits all strategy, but because I think it's really important for clients to know their options. And you may hear things about them, and you're not really sure what they are. So part of it is just educating them on what they can do.

 

Retirement is very different today too. So I think about the idea of pensions not being around as much. Very few companies offer them. There's a lot of market uncertainty. People are living longer.

 

And women, as we hear on Women Talk Money, tend to live longer than men. So I know clients are asking, how do we navigate this? And annuities may be one of the ways we can help.

 

So even well before you retire, an annuity can be there to help even achieve your savings goals. I know that Stefne just mentioned some just have tax-deferred growth. So there's lots of different ways you can use them.

 

I've noticed the misconception about annuities can really turn people off. But I like to educate people, talk about all their potential benefits, and make sure that the word doesn't necessarily mean something to them that they don't really understand. I like to use a metaphor with clients. And I'll say, sometimes maybe you don't like a specific type of-- I'm going to use ice cream as an example.

 

So I might say to a client, do you like ice cream? And they might say, well, I don't like chocolate ice cream. Well, there's lots of different types, right? The same with annuities. So I might say to a client, hey, let me share with you. Have you heard about annuities? Ooh, I don't like them.

 

Well, there's lots of different types. They're not all equal. They may all be different, offer different benefits, have different costs. So I think it's important to educate people on what they can do for them in a plan.

 

ALEX ROCA: You're absolutely right, Gina. Annuities, like we said before, are so often misunderstood. So before we go deeper, I want to do a rapid fire myth-busting session. And I'm going to share a common myth about annuities, and then you tell me the reality. I'm going to start with you, Gina. "Annuities are only for retirees."

 

GINA GILLESPIE: That is not true. There's so many different types of annuities. We talked about that just help with tax-deferred investments or that can help you save tax efficiently. So you could be years out from retirement and still use them.

 

In reality, some of those annuities that we talked about, even Stefne brought up, can give you pension-like income streams. Those are often used for retirement income. But there's lots of other ways that you can use them to achieve savings goals or help you grow your assets, too.

 

ALEX ROCA: OK, so annuities aren't just for retirees. Let's move on to the next one. Stefne, I'll let you take this one. Myth number two is annuities are too expensive and complicated.

 

STEFNE LYNCH: This is one we hear a lot. And so as we mentioned, there are many types of annuities out in the marketplace. With the different types here at Fidelity, we have really distilled down the product types that we offer.

 

And once you go through an educational process, either with a financial consultant or even on fidelity.com, they're easier to understand that you might think. And so our hope in this session is that we can do some of this myth busting and make annuities much more accessible.

 

ALEX ROCA: OK, I like that. And you can always talk to a professional like Gina if you have any additional questions. And that's always part of the conversation. We're going to dig a little bit more into this discussion, Stefne, and I'll have you take this next one too. Annuities give you less control of your money. So this is the third myth.

 

STEFNE LYNCH: Yes. So the reality is there are many types of annuities that offer varying levels of flexibility, income potential, and access to your funds. And keep in mind that there might be fees or surrender charges associated with those annuities if you access your money early, depending on the annuity type that you choose. And so you have more control than you think. And it really is about finding the one that fits your needs and is right for you.

 

GINA GILLESPIE: And I mean, I'd just love to throw in there that you can choose to invest to an annuity the portion of your plan. So it's never been a conversation where we say, this should all go into one thing or another. So think of it as a piece of your plan.

 

Maybe a piece you get an income stream, or there's benefits to it. It's like a diversified investment strategy. It can help you diversify your income streams.

 

ALEX ROCA: Well put, Gina. So I'm actually going to give you this last one. The insurance company gets your money when you die. So this is the fourth myth.

 

GINA GILLESPIE: I hear this a lot. So this is a good one. So in reality, the beneficiaries can receive payments that you put into an annuity contract after you pass. Just depends on what you choose. So you get to build your own policy where you could say, I want my beneficiaries to get a cash refund or all the money that I put into this contract if I die early and haven't collected it myself. You can choose ones with a specific type of death benefit that fits your family and your needs.

 

So I think a big part is understanding what type of product that you have. And each type can be better at different life stages. But if you are one of the ones that do give up some access to beneficiaries, just make sure you choose a death benefit for them. So again, it's always a big question. It's not necessarily true. You get to build your own type of plan with access to that for beneficiaries.

 

ALEX ROCA: Well said. And I think that moves us away from this myth busting. And let's start looking at the different types. Let's break down the annuities a little bit further. That's what we're here to do, to clear up these misconceptions and to share more about the different types so that you know exactly what your options are. So we talked about what an annuity is. Stefne, how do they work?

 

STEFNE LYNCH: It's a great question and, again, one that we get a lot in terms of the two different phases, which is the accumulation phase and then the payout phase. And Gina had mentioned this in the planning conversation or getting ready for the planning conversation. So in the accumulation phase, you are getting ready for retirement. You are accumulating your assets, and you fund your annuity either with a lump sum or with overall periodic payments.

 

Generally, it grows tax deferred. And then when you're ready or getting near retirement, you would have that conversation with your financial consultant and say, I'm getting ready to turn on income. And Gina or another financial professional would say, let's take a look at those sources of income.

 

Do you have a pension? What does Social Security look like? And how does this annuity play into your retirement income plan? And so this is where you would turn on income either for a piece of the annuity or maybe for the entire thing. And it would start generating guaranteed income potentially for life.

 

Now, the one caveat that I do have to say is that, with annuities, if you start accessing your money before you are age 59 and 1/2, there could be some penalties there from the IRS. So that's something just to be aware in terms of your life stage planning and when you might need to access those funds. And then any withdrawals that you would take are taxed as ordinary income and not capital gains as a mutual fund is. So just some things to keep in mind as you're having these conversations and starting to put together your plan.

 

ALEX ROCA: Definitely something to think about. So just to recap, annuities are contracts with insurance companies that you purchase a contract in return for income now or in the future. So that sounds pretty straightforward. But there are a lot of different types of annuities, right, Stefne?

 

STEFNE LYNCH: It's true. There are a lot of different types of annuities in the marketplace. But if you step back, there are really a few main types that make it easier to understand. And we have a slide that helps break this down with the basic types.

 

So first, on the left-hand side, you see there's an income annuity. And that income annuity turns your investment into guaranteed income, either for life or for a set number of years. So you get a fixed payment no matter what the market does.

 

And then these often factor in when you're doing your retirement income planning or creating a paycheck for yourself in retirement. So say you're in your 60s or retiring soon. An income annuity could help you cover your essential expenses with that guaranteed income stream.

 

On the other side of the page, there's a tax-deferred annuity. And that can provide the benefit of growth potential and accelerate your retirement savings as well as give you the option to create lifetime income in the future. So this is what you would be thinking about as you're heading into your retirement income planning phase, but not necessarily at the income phase. And so if you're someone younger in your 40s and your savings for retirement, you might consider a tax-deferred annuity as an option.

 

And then there are variable or fixed annuities. Variable offers a varying level of market exposure for potential growth but come with some risk. And then the fixed annuities works more like a bond or a CD to give you a steady return for a fixed period of time. And that can provide stability, especially as you near retirement. And so a financial professional like Gina can help you figure out what's right for your needs and put together that retirement income plan.

 

ALEX ROCA: Now, Gina coming back to you. Earlier, you talked about how annuities aren't just for retirees. Can you tell us a little bit more about the different ways that they could fit into your overall plan regardless of age?

 

GINA GILLESPIE: Yeah, definitely. So Stefne just did a really great job of highlighting all different types, right? Income, tax deferral, all the things that can get overwhelming. But obviously, come and sit down with someone. And we can help you to figure out where it might fit.

 

So I talk with different clients in different life stages. And one of the things that tends to be a conversation around is saving efficiently for retirement. So there's different types of annuities that you can utilize. And when you're saving for retirement or leading up to retirement or in retirement, there may be different vehicles to use.

 

So when you're building up savings prior to retirement, there are situations where you may not have a lot of employer plans or offerings from an employer. I had clients who have come to me before that they work for an employer, but they don't have a 401(k) or a 403(b) plan. So they're maximizing everything that they can through maybe smaller IRA contributions. But they came to me to say, are there any other tax-deferred vehicles or any other efficient vehicles I can save?

 

So when we look at this, just deferred annuity can be a great way to help to say, I want to set up strategic savings vehicle and then use this money someday. But I can shut off the taxes. So Stefne did bring up earlier that has the same kind of rules, 59 and 1/2, where you may have penalties if you take money out before then.

 

Same kind of rules as a retirement account. So you can take nonretirement dollars and save them, put them aside for longer term. And you can be in charge of that investment strategy. You don't have to worry about being efficient with how it grows. You don't get a 1099 or a tax form each year as you wait. So that's one way if you're approaching retirement or you're pretty far away, that one could still be appropriate for you to maximize.

 

ALEX ROCA: I want to follow up on that, Gina. Can you talk about what you might want to be thinking about as you're approaching retirement?

 

GINA GILLESPIE: Definitely. It's a big shift. It can be. It is a big shift, right? You go from saving and saving and saving money and watching your net worth grow, hopefully. The idea behind it is that you have a paycheck coming in.

 

And so it's such a big shift of mindset. I have some individuals who come in, and they aren't sure how to spend. They're not sure how to get into that next phase of life. So I ask clients about things that might derail their plan.

 

Example-- if we see market volatility, do you find that you would spend differently, enjoy retirement differently? Do you find that it would stress you out more? Let's talk more about how you would feel. I think a big part is that once you retire, you're retiring so that you can enjoy right things. So it can help to protect your retirement income by creating a strategy.

 

Now, annuities don't have to be the only way to do this, but it's just one of those ideas. And so I think it's nice to talk a little bit more about how market fluctuations, when you're saving money, can be totally different than when you're trying to take money out.

 

So think about it. You're sitting in an office with an advisor, and maybe you're five years out from retirement or around that. And you're thinking, what do my monthly expenses look like? I think that's a great first step to say, what do I think I need? And this will help us to say, how are we going to achieve the income that we're looking for?

 

So we come up with what we call a retirement income plan, a cash flow plan. We're trying to come up with a predictable way to understand what we might need for retirement. So we look here, and we say, OK, what's a good rule of thumb?

 

Most people expect to spend-- you can see it right here-- 55% to 85% of your preretirement income annually. Remember, you're saving. So you may be making those 401(k) contributions or saving strategies. So that's why 55% to 80%.

 

Some people say, I hope I don't have a mortgage anymore. I hope some of my expenses look maybe different. I hope if I have children or other dependents, they may be off on their own. So that's where that 55 to 80 comes in.

 

But remember, not everybody's situation is the same. Maybe you need to spend more. So I think it's good to really look at spending habits and understanding where you spend money today.

 

Oftentimes I break it down to two places-- essential expenses or the I have to haves. And you could make those the non-negotiable things right in front of us. You can see housing, food, utilities, health, taxes.

 

Remember, it could also be things like, I love this annual girls' trip that I go on, or I really think it's important for me to take family trips with my family. Or you can put essential things. It doesn't have to just be to keep the lights on, things that are non-negotiable for your retirement.

 

And then you think about the income sources. You want those to be predictable for those necessary things. So we could look at Social Security. Do you have a pension from an employer? Or we can look at bridging that gap with income annuities, very predictable, can outlive those income streams. Those checks come to you on a very, set schedule.

 

Then we look at discretionary expenses. So what are those? That's your fun stuff, right? That's like maybe the extra, extra things. So I think about other discretionary things could be maybe I go on some shopping trips, or I don't have to do all those things.

 

Or if I had to cut back on these things, I'd be OK with it. I'd be OK with it. So oftentimes when you think about discretionary things, that could be where we take distributions from investment accounts. The accounts can fluctuate in value. And it's OK if sometimes if I take a little less or I'd feel fine if I didn't take distributions in that dollar amount each month.

 

So when I think of other income sources, it could be, again, from your 401(k) or a 403(b) or workplace plans, IRA or other retirement accounts, brokerage or investment accounts, nonretirement accounts, or maybe cash that you have on hand too.

 

So when I think about all these things, just go back to the guaranteed income sources. They can play a role in a plan, really, to help give you comfort when you're in this distribution phase of your life that market ups and downs don't have to derail the essential I have to haves, the non-negotiables.

 

STEFNE LYNCH: And I would add, if you want to get a sense of what your monthly income might look like, either for you or for you and your spouse with a fixed income annuity, we have a calculator online that makes it super easy for you to get a sense of what that lump sum might be and what the monthly benefit might be. And so it compares the income generated by different types of annuity solutions just so you can start to get comfortable, get familiar, and understand what a reasonable amount might be.

 

And so we'll link to this tool. It's called the Guaranteed Income Estimator in the chat. And I also want to reiterate that annuities aren't either-or. They are rather "and." So as Gina had mentioned, they are a portion of the overall retirement income plan and really specializing in how to cover off those essential expenses with guaranteed sources of retirement income.

 

GINA GILLESPIE: I love that, yeah. I love that because I was just going to say, if you look at the chart in front of us, I think about that myth, Stefne, of annuities of, well, Social Security, these are guaranteed sources of income that are in front of us. Social Security is guaranteed by the government. The pensions are guaranteed by maybe employer that you would work for or someone who you'd work for that offers those pension-like income streams.

 

The annuities just offered taking some of your own assets and offering those same guarantees by an insurance company help to bridge those gaps. And I love the calculator online because it just gives you this ability to run a bunch of numbers just to see-- I think clients like to be able to just look to understand, what would it give me if I gave them a small portion? I love that.

 

ALEX ROCA: Absolutely. And it allows you to see different scenarios played out. And it gives you a little more confidence when you're making those decisions. Thank you, Stefne, as well for what you've shared. I'm actually seeing a lot of questions in the chat. And I want to bring it back to you, Stefne, because we talk about the income annuities. Are those payouts really guaranteed?

 

STEFNE LYNCH: In theory, yes. And that really sets annuity income apart from other retirement products. There may be no guarantee that the money in your 401(k), IRA, or other accounts will last as long as you live.

 

And with that said, annuity guarantees are dependent on the ability of the insurance company to make those payments. And that's why it's important to choose a company to partner with that has a very high credit rating. And here at Fidelity, we have partnered with some of the strongest companies in the business.

 

The credit ratings are really important to take a look at because it tells us what the financial strength and ratings of that company are. And it's based on independent ratings agencies. And it really helps us benchmark one company versus the other.

 

And I touched on the vetting process at Fidelity. That's something that is really important to me and to my team here at Fidelity, which is keeping up with all of the insurance companies that we partner with on a regular basis, making sure that they are financially strong and then making sure that the products that we offer through Fidelity are the best of the best, easy to understand, and provide excellent consumer value. So we look at this all the time and do so on an ongoing basis.

 

ALEX ROCA: Thank you for that. I think this leads perfectly into-- we've learned what an annuity is. We've myth-busted some of the misconceptions. Now, I think we need to move on to what might work for your specific situation. So Gina, when you're helping clients decide if an annuity might be the right solution for them, what kind of questions would be helpful if they asked you? What does that conversation sound like?

 

GINA GILLESPIE: Yeah, definitely. I think we go back, and it's hard to know how you'll feel when you're in retirement, when you're not in retirement. Or you could be in retirement, and you're just learning some of these things.

 

So I think some of the most important things-- so let's say you sit with a financial professional. You're here, and you say, I really want to learn more if this is going to be right for me. We can talk about the types of annuity strategies. We look through, when do you need income? Do we need it now? Do we need it later?

 

They could still be very appropriate for if you need it later. But we look at market growth and preserving and protecting some of that growth that you have. And you say, I want to take some of this and give me some income on this later. That still can be a very, very appropriate strategy.

 

So I always say one of the questions, do we need income now? Do we need it later? It's the same kind of chart that we were talking through with Stefne earlier. Then do I want guarantees? Or do I want growth potential? You can want both. It's OK.

 

We also said earlier that part of it is, well, for the must-haves, I have to haves, the non-negotiables, I really want predictability. And for the long-term pieces and the maybes, I really want growth potential. So it's OK to do both. If you err on one side or another, there are types of annuities that give you more growth potential, too, so you can do a little bit of both with the same type of strategy.

 

How much flexibility do you need? That's another question. So you think about it. First is when do I need the income? Do I want to give up access? How much flexibility do I need? I love to go through this sometimes.

 

It always sounds really nice to have the most flexibility, but some annuities that give you more flexibility that you can cancel the contract, that you can, over time, get money back, maybe give you a little less income in your lifetime. So I've had a lot of clients who said, well, let me talk about the trade-offs. The same with the calculator that Stefne brought up online.

 

Well, does the flexibility take away some of the income I might need? So how much flexibility do I really need with the assets I'm going to put towards an annuity? Because remember, there'll be other money there too.

 

And then this is the hardest one that I think about a question to ask yourself. In times of market volatility, how do you think I'd feel about income being retired? It's really hard, because when you're not retired, it's hard to know.

 

I know investors will ask the questions, tell me more about what you've done in the past during market volatility. And a lot of the answers were I stayed invested. I keep saving my money. But when you're truly retired-- and I'll share a couple quick examples--sometimes things change.

 

So I've been working in our investor center here at Fidelity for over 13 years. I worked at another company before that. And there's been so many different gyrations of market ups and downs in that time last 18, 19 years.

 

And in 2020, I think a lot of people might sit down and remember where we were. Those first couple of months, there was extreme market volatility. When I say extreme, much quicker the pace of the market changes and the percentage of volatility as well.

 

I had a call from a client, and they said, Gina, I know we talked about having some preservation or some protection or some safety in my plan, and I didn't do it. And now I'm wondering, should I stop taking money out of my accounts? Should I stop taking distributions? Well, let's take a step back. What do we need to live off of? And are these things that are really important to you today?

 

Now, remember, in 2020, we might not be taking a lot of those vacations or the discretionary things. So we were really just looking at, what do I have to take out for the necessary expenses? Just six months later, I remember having a same conversation with that same client, and they said, oh my gosh, the market has recovered, and it recovered quite quickly.

 

And if I could have a do-over, which I do feel like I have that now because my investments have now grown back to where they were, I really see the benefits of preserving, protecting, making sure that when the markets are crazy, I'm not worried about the I have to haves or where that money's coming from. I felt a little different when the markets were changing, and I was taking money out versus saving.

 

So that's a big piece is that emotional piece of trying to figure out how to live off of assets. It's so hard to answer. So I share that with you all today, kind of little story because the emotional piece know that, as an investor, you're sitting here on the call. And you might say, I don't how I'd feel when I'm retired, and that's OK. But that's a big part of how those protected preservation, safe assets can help us when we're in a different phase of life.

 

ALEX ROCA: And you can change the way that you feel one stage to the next. GINA GILLESPIE: Yeah, definitely.

STEFNE LYNCH: And we also have a slide to bring up that can help you align your needs with the options. And so as Gina was talking, I was going through this in my mind.

 

GINA GILLESPIE: Yeah, I love this.

 

STEFNE LYNCH: The chart is a lot to take in. But you can download the resource slides if you want to spend a little bit more time with it. But the top of the chart shows different objectives that you might have. And that goes across the top, and then it matches with different annuity product categories on the vertical.

 

And so this is where you can start to identify, is it a deferred annuity? Is it an income annuity? Are you looking for guarantees in terms of income? And you can start to zero in on what might be the best fit for your needs.

 

And so for example, if you're looking to save more for that tax-deferred retirement plan or objective, you would like a guaranteed rate of return, a deferred fixed annuity might be a good option for you. And so this is another great resource to take away from this webinar. And you can also find it on the fidelity.com website.

 

ALEX ROCA: I want to build on that a little bit as well. So what other things should we be aware of when we're thinking of investing in an annuity?

 

STEFNE LYNCH: There are a few that come to mind, one being that there are surrender charges. So if you want to take your money out before the time period, there could be some surrender fees or charges. It is more of a longer-term commitment. It can range from as little as three years up to that payout for life that we were referencing in the income annuities. So really be aware of the time span that you are looking at when you're talking about annuities.

 

Again, I'll mention any withdrawals taken pre-59 and 1/2 would have an IRS 10% penalty associated with it. So definitely be cognizant of your age or the age in which you plan to take those withdrawals. And really do some education. Ask a lot of questions about the types of annuities.

 

They have different fees depending on the product, depending on the type. So take the time to ask a lot of questions, understand what's being presented to you, and really drill down into those areas.

 

As I mentioned, a financial professional can help you unpack this slide, understand all of the different options that are available to you. And the key here is finding the right product to fit your goals. And it may not be an annuity. It could be a conglomeration of some other investment strategies. But certainly, for retirement income, I think that it could fit for a piece of it. So just a few things to consider there.

 

ALEX ROCA: I appreciate it. That actually leads me to one of the questions that I'm seeing here on the chat. So if you see me looking around, it's because I'm looking at the chat as well. "If you're looking to smooth out market volatility, why not just invest in just bonds and CDs?" Gina, can you tell us a little bit more about this?

 

GINA GILLESPIE: Oh, yeah, definitely. So a bond and a CD, it could be a part of a plan, right? But if you're thinking of it taking the place of an income stream, like a annuitization or an income annuity, the thought behind it is that all types of investments will carry some different risks.

 

So bonds and CDs carry something called reinvestment risk. So that means that when that security matures, we don't know where the rates will necessarily be. It could be higher. It could be lower. So if rates have gone down, you're reinvesting at a lower rate.

 

So I'll give you a quick example. So it can be a strategy, but it's not as predictable, right? When you think about it, you have-- let's just say you're getting 4% interest on a CD or a bond. And when that bond or CD comes due at its maturity, you look to reinvest it in another strategy, one-year, two-year, three-year, whatever you decide you want to do. And interest rates have gone down. Instead of 4%, let's say it's only 1% or 1 and 1/2%.

 

Now, we either have to take less interest or income has gone way down, or we have to eat away at the principal a little bit to be able to get the same type of check we were getting before. So that's just an example of it can be a strategy you can utilize, but it's just a little different because it has that reinvestment risk we call.

 

ALEX ROCA: Now, this is a question that comes up a lot. What if you have a pension and you're not giving an opportunity by your employer to either receive it as a lump sum or transfer it into an annuity? So you can choose one or the other with that pension.

 

Gina, what do you typically suggest to your clients? What do you have them consider when they're weighing that decision?

 

GINA GILLESPIE: Oh, I love this question. And you know what? We get this all the time because oftentimes it's like, is this a good deal? Is this a good option? I don't know, right? So I always say, let's do a review and understand our options when it comes to that pension plan.

 

So I think the question Alex just brought up is I have this pension. I could take income for life. I could take a lump sum. What do I do? So there's lots of different scenarios.

 

So for some clients that we might sit there, well, let's look at, how much income you get versus the lump sum that they're offering? And we could also compare it to say, if I moved it to an insurance company, I annuitized it outside of the pension plan, could I get more income? Could I get different choices when it comes to beneficiaries? So I love to do a comparison.

 

So sometimes you could also take that lump sum and invest it. So I'll give you a quick scenario. Husband and wife both had pensions. And with Social Security and pension income, they didn't really need both pension offerings. One offered a lump sum.

 

So they saw the benefit of taking one as a pension and one as a lump sum and investing it and using it a little differently. So that's just another scenario that it's nice to know you have a little bit of flexibility. It can be hard to decide what to do.

 

That's why when clients will ask me-- and I get a lot of emails like this from my clients. They'll say, hey, I have this pension offering. They just gave me a lump sum. Can you let me know what to do? And I'll say, let's make an appointment because we'll run through numbers. Let's run through scenarios. Let's figure out what's going to be the best strategy for you. It really isn't one size fits all.

 

Just the same with the annuities. And not all pensions will give you really efficient income options. Sometimes you might want to leave different beneficiary options, too, we talked about earlier. So remember, it's nice just to understand all the different things. And again, you come back to talk to an investment professional here at Fidelity, and we'll lay out all the different things you can do.

 

ALEX ROCA: I appreciate you saying that, Gina. We have some additional questions coming in through the chat. So we're going to do a rapid fire. I'm just going to keep asking some of the questions that we're seeing here on the chat. And just feel free to answer if you feel comfortable with the question coming through. So the first one that I want to ask here is, "What is the best way to figure out when you should start taking annuity payments?"

 

GINA GILLESPIE: I'll take this one as the financial planning question. So I think this is a great question. Number one, when will you need the income? So I have some clients who it's not always just right at retirement.

 

What if you have a partner? What if they're still working? So when will your income gap start? When do you want to start taking those pieces? And sometimes there could be efficiencies built in. Most commonly, people want to start taking income when their income through work has ceased.

 

But again, if there's scenarios where there's one spouse working, maybe you created a deferred compensation strategy, so you're going to get income from that in the beginning, it's really when-- I like to think of it like either when your income maybe has ceased or when you need to start filling in gaps. We have really great retirement income software here, and we'll show you visuals of it so we can put in different strategies where if we start it now or later, what that could look like. So real quick answer is it's not the same for everybody. But usually, it's when you start needing that income gap.

 

ALEX ROCA: That's fair. That's fair. That also leads to one of the other questions that I saw bubble up a few times through the chat. And it was in relation how to fund an annuity. So we talked about the lump sum. We talked about the deferred payments. But what about using your 401(k) assets or an IRA? Can you use that to fund an annuity?

 

GINA GILLESPIE: Yeah, Stefne, I'll jump right, in and then you can add anything you're thinking. So if you're still employed with an employer and you're thinking about funding this early, you may be able to take early distributions out of 401(k) and move it to an IRA. You could do that. If you're retired and no longer working for a plan, all those assets may be completely flexible.

 

IRAs or retirement accounts, individual retirement accounts, you can utilize those at any point. That's your money in your hands that you could fund these annuities. And the thing I think about-- Stefne brought this up earlier-- you could fund it with retirement assets or nonretirement assets. Oftentimes people may use those retirement dollars because you'll have these things called required minimum distributions someday on those retirement dollars.

 

Also, it doesn't change the taxation. So it's always ordinary income with an IRA or a 401(k), regardless of if you take it out as just a withdrawal or within an annuity. And then it has the same rules as that 59 and 1/2.

 

So you can use different types of assets. But I think it's important to talk to an individual like myself because it really depends on what you have to take from and where the assets are today and the flexibility you have of what account you can pull from.

 

ALEX ROCA: And just to make sure I understand, Gina, what you're saying is then you would be able to take the assets from the IRA or the 401(k) and purchase an annuity that itself wouldn't cause the taxation, correct?

 

GINA GILLESPIE: That's a great clarification. You start paying taxes on the money when you take distributions when you get those checks. So yeah, it's a direct what we call a transfer or rollover, where it's just that annuity houses it. But it doesn't cause a taxable event in that moment.

 

ALEX ROCA: Until you start receiving the money. GINA GILLESPIE: Yeah, and then you pay--ALEX ROCA: I appreciate that.

 

GINA GILLESPIE: --ordinary income on the withdrawals, just as if you took a withdrawal from the account. So no different than that.

 

ALEX ROCA: I appreciate that. And I'm so glad that you brought the required minimum distributions, because there's a few questions. How would an annuity payment perhaps affect that required minimum distribution?

 

GINA GILLESPIE: So I'm going to step in again, Stefne, or you can jump in. Annuity payments can qualify for those required minimum distributions. They can qualify to help you with that. Depends on the type of annuity and all those pieces.

 

But if you're using retirement assets, so if you're using those qualified 401(k), IRA assets, you have to take required minimum distributions on, the annuity can be considered a part of that number that you have to take from. And some of these are called required minimum distribution friendly.

 

We're kind of getting into the annuity 2.0 now. But I love how smart these individuals here are on the call. They're asking the really great questions. But yeah, annuities can be required minimum distribution friendly. So not necessary that you have to pay more in taxes. It just satisfies maybe part of what you'll have to take the IRS makes you take. 

 

ALEX ROCA: And it's more of that strategy conversation that you're having with the financial professional. It sounds like that's the right time to have that conversation.

 

GINA GILLESPIE: 100%.

 

ALEX ROCA: Right. So Stefne, I want to bring you back in. Somebody is asking, "To ensure that I can pass an annuity to a beneficiary, are there any special steps or anything additional that I need to do to ensure that that happens?"

 

STEFNE LYNCH: It's a great question. It's something that we talk about a lot, which is the annuity contracts have the ability to name beneficiaries. Please, when you are establishing that contract, take the opportunity to put in your beneficiaries, revisit your beneficiary designations from time to time, because you do have that opportunity to name those beneficiaries up to as many as you want.

 

And we've seen some of them that come through with a whole laundry list of beneficiaries. So be thoughtful about it. But my service announcement here is to make sure that you make that beneficiary election as you sign up and do that paperwork right up front, because it does matter and it is really important in the plan and making sure that you are passing those assets to the people who you want to receive them.

 

ALEX ROCA: Absolutely. Now, before we wrap up, I want to ask this because I know it's something that people ask when they're in one-on-one sessions. Gina, I'm sure that you've heard this before. We hear about qualified and nonqualified annuities. Can either one of you take that? What's the difference there?

 

GINA GILLESPIE: So in terms of-- oh I'm sorry. Go ahead. No, no, go ahead, Stefne. Take it.

 

STEFNE LYNCH: So in terms of qualified, qualified dollars are pretax dollars. So that is your 401(k) contributions, your traditional IRA contributions, those dollars not yet been taxed. Non-qualified are dollars that have already been taxed.

 

And so for annuities, the great news is we take qualified dollars. We take nonqualified dollars. And then with the pretax dollars or the qualified dollars, as Gina had mentioned, then you have those required minimum distribution rules that follow suit. So it's totally flexible. You can use pretax or posttax dollars. And I thought that was an excellent question.

 

Or a question for you all to be armed with to ask, is this annuity RMD friendly? Is there anything specific about taking RMDs that might cause any kind of disruption? So it's an excellent question to ask when you're sitting with your financial professional.

 

GINA GILLESPIE: Yeah, totally.

 

ALEX ROCA: I love it. Sounds like we are arming our audience with all the right questions when they go talk to Gina. And one more question for both of you. What is your top takeaway that you would want our audience to leave with today?

 

STEFNE LYNCH: I would say, hopefully, we have helped to myth-bust some of the common questions or common misconceptions about annuities. I think through the tools that we have shown on the screen that will be in your inboxes or on fidelity.com, you can really break them down into the different types and make sure that you understand what might fit your needs and how they work, any kind of rules around them. But it will make you more confident in deciding if they're a good fit for you and your plan.

 

GINA GILLESPIE: And I just add-- to add something additional. I hope today, as you've taken this, just note, it's OK to talk to your financial professional about the different types. And hopefully, today gave you some ability to feel a little bit more confident or feel a little bit more educated on the different strategies. But don't feel like you have to be an expert.

 

Come to us. We'll help you. We'll help you decide if one makes sense or another if they don't at all. We'll find what's aligned to your goals and help you build that financial plan. But I hope today gave you a little bit more confidence to an education as you're going to go have those conversations.

 

ALEX ROCA: Thank you for that, Stefne. Gina, thank you so much for everything that you've shared today. We know that we covered a lot. And we'll also be putting up a slide that gives you access to all the upcoming events and a reminder on how you can get help.

 

And if you haven't already joined, take a picture of the QR code, join the community, and share it. Share the goodness with the women in your family, with your close friends. Have them join the conversation as well. Now, that's a wrap. Stefne, Gina, thank you again for joining. Thank you all for watching and have a great day. We'll see you again soon.