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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.<\/em><\/p>\n A financial planner suggested that I purchase $1.5 million in annuities and invest the other $1 million in stocks and bonds.<\/em><\/p>\n Should I take my adviser\u2019s suggestion?<\/em> Does this sound like good advice?<\/em><\/p>\n Related:<\/strong> I\u2019m in my 30s with $30,000 in a 403(b). I\u2019m facing a $20,000 college-tuition bill. Do I raid my retirement account or take out a student loan?<\/a><\/p>\n Retirement-income planning can feel like an overwhelming puzzle, but you have the pieces there \u2014 you just have to make sure you use them to your greatest advantage.\u00a0<\/p>\n 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\u2019re talking about here.\u00a0<\/p>\n The first, possibly biggest question you need to ask yourself: Is there an income gap you\u2019re trying to fill? Annuities\u2019 main purpose is to fill an income gap in retirement, and you can determine your shortfall after taking account of any guaranteed income you\u2019ll have, such as a pension or Social Security. For example, if you\u2019re 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.\u00a0<\/p>\n 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\u2019re trying to solve for, said Eric Nelson, a certified financial planner and president of Independence Wealth. \u201cTo maximize growth, perhaps an annuity is not the right solution,\u201d he said. Comparatively, if you\u2019re looking for a conservative way to bring in more income, \u201cperhaps an annuity is appropriate,\u201d Nelson added.\u00a0<\/p>\n Many investors use annuities for \u201cguaranteed income,\u201d 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\u2019d 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\u2019re looking at $75,000 in annual income.\u00a0<\/p>\n That could very well be in excess of what you actually need. And it\u2019s 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\u2019re 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 \u2014 like investment portfolios, which you could withdraw from regularly. \u201cThen they can sustain a higher investable net worth for a longer period of time,\u201d Sestok said.\u00a0<\/p>\n 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\u2019ve 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 \u201cRetirement Income Style Awareness,\u201d<\/a> to help them determine what type of retirement income might be best for them.\u00a0<\/p>\n You need to do much more planning before you can answer if buying annuities \u2014 or that much in annuities \u2014 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\u2019re 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.\u00a0\u00a0<\/p>\n If you\u2019ve determined that purchasing annuities makes sense for your particular situation, get very specific about the recommendations of these products \u2014 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?<\/p>\n\nDear Reader,\u00a0<\/h4>\n