Should I Invest $1.5 Million in Annuities at Age 73?
Dear MarketWatch,
I have $1.5 million in my 401(k) and $1.1 million in my IRA. As I approach 73, I am required to start taking required minimum distributions (RMDs). Recently, a financial planner recommended that I invest $1.5 million in annuities and allocate the remaining $1 million to stocks and bonds. I am uncertain about whether I should follow this advice. Is this a sound recommendation?
Retirement-income planning can often feel daunting, but you already have some key pieces in place. However, before making any decisions or purchases, it’s crucial to ask yourself a few important questions, taking into account the significant amount of money involved.
Is There an Income Gap to Consider?
The first question you need to ask yourself is whether there is an income gap you’re trying to fill. Annuities are primarily used to bridge the income gap during retirement. You can determine this by comparing your projected retirement spending to your expected guaranteed income from sources like Social Security or a pension. For example, if you anticipate spending $60,000 per year in retirement but your Social Security checks only cover $25,000, then you have an income gap of $35,000. The next step is to determine how to fill that gap, which could involve considering annuities or a combination of investment accounts.
Understanding the Financial Adviser’s Recommendation
It’s essential to understand the reasoning behind your financial adviser’s suggestion to allocate such a significant amount of money to annuities. Ask them about the problem they’re trying to solve and the goals they have in mind. If you’re seeking maximum growth, an annuity might not be the most suitable solution. However, if you’re looking for a conservative approach to generate more income, an annuity could be appropriate.
While annuities offer guaranteed income, it’s important to evaluate whether the proposed amount is necessary or excessive for your needs. Consider the fees associated with annuities and the impact they may have on your overall financial plan. By focusing solely on annuities, you may miss out on more efficient ways to allocate your money. Working with a qualified financial planner can help you explore alternative strategies to maximize your net worth and sustain it over a more extended period.
Factors to Consider
There are different types of annuities, including fixed and variable annuities. Each type has its own set of considerations and potential benefits. It’s crucial to analyze the terms, surrender timelines, charges, and restrictions associated with the specific annuities recommended to you. Also, diversifying your annuity providers can add an extra layer of protection, particularly considering the state limitations and the credit ratings of insurance companies.
In addition to annuities, ensure you have some liquid cash available outside of annuities and investment portfolios. Retirement income planning requires a strategy that balances growth and preservation while allowing flexibility for unexpected expenses.
When evaluating the recommendations, consider the potential conflicts of interest your financial planner may have. It’s essential to ensure their advice aligns with your best interests.
Investing for retirement involves careful planning and consideration of your unique circumstances. It’s vital to conduct a thorough analysis of your current budget, future expenses, and income expectations before deciding whether annuities are suitable for your situation.
Remember, the information provided here is general in nature, and it’s always recommended to consult with a qualified financial professional who can consider your specific needs and goals.