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I’m 73 and my financial adviser told me to buy $1.5 million in annuities — should I do this?


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“Should I take my adviser’s suggestion? Does this sound like good advice?” – MarketWatch photo illustration/iStockphoto

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I have $1.5 million in my 401(k) and $1.1 million in my IRA. I will be 73 in 2024 and must start RMDs.

A financial planner suggested that I purchase $1.5 million in annuities and invest the other $1 million in stocks and bonds.

Should I take my adviser’s suggestion? Does this sound like good advice?

Related: I’m in my 30s with $30,000 in a 403(b). I’m facing a $20,000 college-tuition bill. Do I raid my retirement account or take out a student loan?

Dear Reader,

Retirement-income planning can feel like an overwhelming puzzle, but you have the pieces there — you just have to make sure you use them to your greatest advantage.

Annuities make sense in some circumstances, but you have to ask yourself a few questions before you proceed with any sort of advice or purchase, especially given how much money we’re talking about here.

The first, possibly biggest question you need to ask yourself: Is there an income gap you’re trying to fill? Annuities’ main purpose is to fill an income gap in retirement, and you can determine your shortfall after taking account of any guaranteed income you’ll have, such as a pension or Social Security. For example, if you’re a single individual who anticipates spending $60,000 a year in retirement, but your Social Security checks would only make up $25,000 of that, you have an income gap of $35,000. Your next step is to figure out where the rest of your money will come from, and that occasionally includes an annuity. It could also be an investment account, or it could be a mix of the two.

Do you understand why this financial adviser is suggesting you put such a large amount of money in one type of product? Ask this professional what problem they’re trying to solve for, said Eric Nelson, a certified financial planner and president of Independence Wealth. “To maximize growth, perhaps an annuity is not the right solution,” he said. Comparatively, if you’re looking for a conservative way to bring in more income, “perhaps an annuity is appropriate,” Nelson added.

Many investors use annuities for “guaranteed income,” but your adviser is suggesting you use a lot of money to purchase this type of product, which would result in a relatively large sum of money coming in every year. It is hard to get too specific about the amount of money you’d see every month or year from annuities without having all of the terms and variables in front of you, but if you were to be very simple about it and, say, you expect a 5% distribution from $1.5 million in annuities, you’re looking at $75,000 in annual income.

That could very well be in excess of what you actually need. And it’s not necessarily in your best interest financially to have more income from annuities than you actually need, as you could use that money in a more efficient manner elsewhere. You’re paying for that guaranteed income, said Byrke Sestok, a certified financial planner with Rightirement Wealth Partners. Depending on the annuity, you could see charges of 2% or 3%. Conversely, you could construct a strategy involving more liquidity — like investment portfolios, which you could withdraw from regularly. “Then they can sustain a higher investable net worth for a longer period of time,” Sestok said.

There are many types of annuities. As the name implies, a fixed annuity provides you with a set amount of money based on the terms you’ve selected, whereas a variable annuity will provide income that fluctuates based on the market. There are also many variations of the two. Annuities can also include riders. Wade Pfau, founder of Retirement Researcher, an educational resource for individuals and financial advisers, created an assessment tool for investors, called “Retirement Income Style Awareness,” to help them determine what type of retirement income might be best for them.

You need to do much more planning before you can answer if buying annuities — or that much in annuities — is right for you. Look at your current budget, as well as what you expect to spend in the future. Take into consideration any sort of retirement income you can expect during this time, as well as big, possibly unexpected expenses (think healthcare). Try to figure out what sort of income gap you might have based on all of this planning. And while you’re at it, be honest with yourself about whether or not you might be more interested and comfortable with an alternative method for retirement income, such as investment portfolios. A qualified financial planner can help you construct portfolios in a way that gives you the income you need and the flexibility for the unknown.

If you’ve determined that purchasing annuities makes sense for your particular situation, get very specific about the recommendations of these products — and where they are coming from. Ask the planner why they chose these particular products (after determining if this adviser is really looking at the big picture and working in your best interest). Do they, for example, have an incentive to recommend this product over another?

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Next, look at the stipulations of the product or products, including surrender timelines and fees (many products have a seven-year surrender period, which means you’d pay a penalty for withdrawing before the seven years is up, Sestok said). Ask yourself what other fees and restrictions exist, and what options you have should you need to access that money. “One of the biggest drawbacks is going to be the issue of liquidity,” Nelson said.

If you’re sticking with the amount of money suggested to you, consider getting more than one annuity, and diversifying the companies you get them from. Pfau said, “$1.5 million is quite a bit of an annuity premium.” Many states have protections in place should an insurance company go under, with caps at about $250,000 or $300,000 in many cases, he said. It wouldn’t be a bad idea to stick to those limitations for another level of protection. Also, check the credit ratings of the insurance companies selling the annuities, and only go for the stronger-rated choices.

A few more quick notes. It sounds like this adviser is suggesting all of the money in your 401(k) go into annuities, in which case, look first to see if your 401(k) provider has an in-plan option for annuities, and if you’re eligible for it. Sometimes, these plans have better pricing available than if you were to roll the money into an IRA and then purchase an annuity.

Also, be sure to have liquid cash available outside of annuities and any investment portfolios. There are a myriad approaches to retirement income — and yes, it very much is a puzzle — but aside from having the ability to diversify your assets, find a strategy that provides growth for the future and preservation for the present, and also allows you the ability to dip into your money if you ever needed.

By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

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