I am 73 years old and my advisor told me to purchase $1.5 million in annuities. I should do it?

Should I take my advisor’s suggestion? Does this sound like good advice to you?

Related: I’m 30 years old 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 may seem like an overwhelming puzzle, but the pieces are already there—you just need to make sure you use them to your greatest advantage.

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

The first, perhaps biggest question you need to ask yourself: Is there an income gap you’re trying to close? The main purpose of annuities is to fill an income gap in retirement, and you can determine your shortfall by taking into account any guaranteed income you will have, such as a pension or Social Security. For example, if you’re a single individual who plans to spend $60,000 a year in retirement, but your Social Security checks would only account for $25,000 of that amount, you’ll 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 advisor suggests you invest such a large sum in just one type of product? Ask this professional what problem he is trying to solve, said Eric Nelson, certified financial planner and president of Independence Wealth. “To maximize growth, perhaps an annuity is not the right solution,” he said. By comparison, if you’re looking for a conservative way to bring in more income, “maybe an annuity is appropriate,” Nelson added.

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

It may very well be more than what you actually need. And it’s not necessarily in your best interest financially to have more income from annuities than you actually need, since you could use that money more efficiently elsewhere. You’re paying for that guaranteed income, said Byrke Sestok, a certified financial planner with Rightirement Wealth Partners. Depending on your annuity, you may see charges of 2% or 3%. Instead, you could build a strategy that involves more cash, such as investment portfolios, from which you could withdraw regularly. “So they will be able to sustain a higher investable net worth over a longer period of time,” Sestok said.

There are many types of annuities. As the name suggests, a fixed annuity provides you with a set amount of money based on the terms you select, while a variable annuity will provide income that fluctuates based on the market. There are also many variations of the two. Annuities can also include cyclists. 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 They.

A lot more planning needs to be done before you can answer whether purchasing annuities – or a similar amount in annuities – is right for you. Check your current budget and what you plan to spend in the future. Take into account any type of retirement income you can expect during this time, as well as large, possibly unexpected expenses (think healthcare). Figure out 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 or not you’d be more interested in and comfortable with an alternative method for retirement income, such as investment portfolios. A qualified financial planner can help you build portfolios to give you the income you need and the flexibility for the unknown.

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

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Next, look at the fine print of the product or products, including return timelines and fees (many products have a seven-year return period, meaning you’d pay a penalty for withdrawing before the seven years are up, he said Sestok). 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 will be the liquidity issue,” Nelson said.

If you’re sticking with the suggested amount of money, consider getting more than one annuity and diversifying the companies you get them from. Pfau said, “$1.5 million is a nice annuity premium.” Many states have protections in case an insurance company goes out of business, with limits at around $250,000 or $300,000 in many cases, he said. It wouldn’t be a bad idea to stick to those limitations for another layer of protection. Also, check the credit ratings of the insurance companies selling the annuities and choose only the highest rated choices.

A few more brief notes. It appears that this advisor is suggesting that all the money in your 401(k) go into annuities, in which case, first check whether your 401(k) provider has an option in the plan for annuities and whether you qualify for it. Sometimes, these plans are priced better than if you invested the money in an IRA and then purchased an annuity.

Also, make sure you have cash available outside of annuities and any investment portfolios. There are myriad approaches to retirement income – and yes, it really is a conundrum – but beyond having the ability to diversify your assets, find a strategy that offers growth for the future and preservation for the present, and also allows you possibilities to tap into your money if you ever need it.

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