“Should I follow my advisor's suggestion?  Does that sound like good advice?

“Should I follow my advisor’s suggestion? Does that sound like good advice? – Photo illustration by MarketWatch/iStockphoto

Dear Market Observer,

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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 need to start RMD.

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

Should I accept my advisor’s suggestion? Does that sound like good advice?

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

Dear reader,

Planning for retirement income may seem like an overwhelming puzzle, but you have the pieces there; You just have to make sure you use them to your greatest benefit.

Annuities make sense in some circumstances, but you should ask yourself a few questions before proceeding with any type of advice or purchase, especially given the amount of money we’re talking about here.

The first, possibly most important, question to ask yourself: Is there an income gap you are trying to fill? The main purpose of annuities is to cover the income gap in retirement, and you can determine your shortfall after taking into account any guaranteed income you will have, such as a pension or Social Security. For example, if you are a single person who expects to spend $60,000 a year in retirement, but your Social Security checks would only account for $25,000 of that, you have a $35,000 income gap. The next step is determining where the rest of your money will come from, and that sometimes includes an annuity. It could also be an investment account or it could be a combination of both.

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

Many investors use annuities to obtain “guaranteed income,” but your advisor suggests that you use a lot of money to purchase this type of product, which would result in a relatively large sum of money each year. It’s hard to be too specific about how much money you would see each month or year in annuities without having all the terms and variables in front of you, but if you were very simple about it and, say, expect a 5% distribution of 1 .5 million dollars in annuities, you get $75,000 in annual income.

That may very well exceed what you really need. And it’s not necessarily in your best interest financially to have more annuity income than you really need, since you could use that money more efficiently elsewhere. You’re paying for that guaranteed income, said Byrke Sestok, certified financial planner at Rightirement Wealth Partners. Depending on the annuity, you could see charges of 2% or 3%. Instead, you could build a strategy that involves more liquidity, such as investment portfolios, from which you could periodically withdraw. “Then they will be able to maintain a higher investable net worth over 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 have selected, while a variable annuity will provide you with income that fluctuates based on the market. There are also many variations of the two. Annuities may also include riders. Wade Pfau, founder of Retirement Researcher, an educational resource for individuals and financial advisors, 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. they.

You need to do a lot more planning before you can answer whether buying annuities, or that amount in annuities, is right for you. Look at your current budget, as well as what you expect to spend in the future. Consider any type of retirement income you can expect during this time, as well as any large and possibly unexpected expenses (think health care). Try to determine what kind of income gap you might have based on all this planning. And while you’re at it, be honest with yourself about whether you might be more interested and comfortable with an alternative method of earning retirement income, like investment portfolios. A qualified financial planner can help you build portfolios in a way that gives you the income you need and the flexibility for the unknown.

If you have determined that purchasing annuities makes sense for your particular situation, be very specific about the recommendations for these products and where they come from. Ask the planner why he or she chose these particular products (after determining whether this advisor is truly looking at the big picture and working in your best interest). Do they, for example, have any incentive to recommend this product over another?

See also: We have four homes valued at $6 million, plus stocks and collectibles worth millions more. Do we receive a long-term care policy or do we pay for it out of pocket?

Next, look at the stipulations of the product or products, including deadlines and surrender fees (many products have a seven-year surrender period, meaning you would pay a penalty for withdrawing before the seven years are up, Sestok said ). Ask yourself what other fees and restrictions exist and what options you have if you need to access that money. “One of the biggest drawbacks will be the liquidity issue,” Nelson said.

If you stick to the amount of money they suggested, consider getting more than one annuity and diversifying the companies you get them from. Pfau said, “$1.5 million is a pretty big annuity bonus.” Many states have protections in place if an insurance company goes bankrupt, with limits of around $250,000 or $300,000 in many cases, he said. It wouldn’t be a bad idea to stick to those limitations to get another level of protection. Also, check the credit ratings of the insurance companies that sell the annuities and only opt for the highest-rated options.

A few more quick notes. It sounds like this advisor is suggesting that all of the money in your 401(k) be put 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 prices available than if you rolled the money into an IRA and then purchased an annuity.

Also, make sure you have liquid cash available outside of annuities and investment portfolios. There are countless approaches to retirement income (and yes, it’s largely an enigma), but in addition to having the ability to diversify your assets, find a strategy that provides growth for the future and preservation for the present, and that also gives you Allow yourself the ability to dip into your money if you ever need it.

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