An annuity, 'for a lot of people is a pension replacement vehicle,': Becker Retirement Group Owner

Becker Retirement Group Owner, Arwen Becker, joined Yahoo Finance Live to discuss the four different kinds of annuities and how they can help you with preparing for retirement.

Video Transcript

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ADAM SHAPIRO: Let's take some time to look at some important issues regarding retirement, sponsored by Fidelity. And to help us do that, we invite into the stream Arwen Becker, Becker Retirement Group owner and author of "She Handled It."

Thank you for joining us. And one of the things that-- we all go through the, you need this amount of money when you retire. But that conversation is changing to, you need this amount of money when you retire to kick off this amount of income monthly. That's a better way for people to look at it, isn't it?

ARWEN BECKER: Absolutely. You know, I have seen people retire with less than $100,000 in retirement savings. And I've seen people who've really struggled that have had, you know, a couple of million. Because really, it does come down to expenses and income. And so it's seeing how these pieces work together, if it really, you know, provides that direction.

SEANA SMITH: I mean, when you're trying to figure out how exactly is the best way to go about it, what kind of advice would you give someone today?

ARWEN BECKER: Well, I think it's really important to let people know that every situation is truly unique. So that's why you hire an advisor or a planner to be able to help you understand your unique situation. So that's an important component. But then being able to understand what tools really truly work for you, because just because something works for somebody, you don't know what it is that's going on in their unique situation. That might not be the right investment or tool for you.

And so, I know you had mentioned at the top of the segment about annuities. And, you know, I always like to say a lot of people have pretty limited knowledge or no knowledge from what we've seen when people come in about what an annuity is. Or they think all annuities are the same. And so really, it's kind of that quick one-on-one. What is an annuity? Well, an annuity is a steady stream of payments. It's something that, for a lot of people, is a pension replacement vehicle.

But not all annuities are the same. So you've got these four different types. You've got the immediate annuity. That's where somebody might give a chunk of money to an insurance company. And then they're going to give instant payments out to that individual. The part of retirement, that might not be the best because oftentimes you lose control over the principal balance. So if you were to pass away prematurely, it goes to the insurance company, not to your heirs. So that might not necessarily be the best thing for somebody in retirement.

But then there's the fixed annuity. It's like a CD at the bank, just better upside and no downside risk. A lot of people like it for that reason. But if the market's on a tear, you're not really getting any benefit for that period of time in the market. So that just might not be the best thing for you long term.

And then a lot of people know about variable annuities. Great upside potential, but downside risk. And so people need to be aware of that. Because when we're looking at retirement, we want to make sure that we have some of our assets in a position where they're not going to go up and down and fluctuate with the market. So a variable annuity has great upside potential, but it has risk.

And then the fourth one that we have often found is really helpful for a lot of people who don't have a pension would be a fixed indexed annuity. So that has the upside potential of the market to a degree-- more than a fixed annuity. It's not a declared rate, but it doesn't have downside risk.

And so a lot of retirees, as they're moving out of the working years and accumulation, accumulation, growth, growth, growth, and now they're moving into preservation mode and they need income, that can be a really good piece to fit in the overall plan. But again, it's unique to everybody. So that's why you sit down with a planner to make sure it's right for you.

ADAM SHAPIRO: And in some of these products, there are, you know, clauses that allow if you should take the fixed income annuity and you should die before the payout, there's a return to your heirs of just the original principal, not the growth, but the principal.

But I wanted to ask you this because a lot of us are going to start getting statements on a yearly basis about what might be in our 401(k) and what that's worth were it to be annuitized. Is this-- I was reading about this, and it was something to do from a congressional act. Are we all going to get inundated with things that don't make sense in the here and now because it's so far out?

ARWEN BECKER: I'm honestly not even sure, you know, exactly, what it is that you're referring to. You're talking about it if we're going to be able to understand what it is that they're sending to us. Is that what you mean?

ADAM SHAPIRO: There was an article where they said that starting this year, all 401(k) managers will be sending people within 401(k)s statements about here's how much you've got in capital. And if you were to retire at this moment and buy a fixed annuity, this is what it would kick off every month in retirement. But that--

ARWEN BECKER: Yeah.

ADAM SHAPIRO: That's the wrong message in some ways, isn't it?

ARWEN BECKER: Absolutely. It might not necessarily be the wrong message, but it just might not be the best thing for you. And that's why you do this side by side comparison. Because a lot of individuals are getting laid off. And maybe they were fortunate to work for a company that did have a pension. And now they're saying, well, let's just start the pension and turn it on.

Well, you might be better to roll that lump sum out and be able to have greater flexibility as to what you're doing with it and making sure that you're fully retaining that principal balance. And that's the piece that people are facing. Is it best for me to have the company manage it? Or is it better for me to look at outside companies that have an outside advisor that has a lot of different companies that I could potentially put my money with and see what's truly going to be best for my situation. So you always need to look at these pieces all together.

ADAM SHAPIRO: All right, Arwen Becker, Becker Retirement Group owner and author of "She Handled It." We appreciate your being here, and a reminder that our retirement segment is sponsored by Fidelity. We'll be right back.