I am 73 years old and my advisor told me to buy $1.5 million in annuities. Do I need to do this?

Should I take my advisor's suggestion? Does this sound like good advice?

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

Dear reader,

Retirement income planning can seem like a puzzle, but you've got the pieces there — you just have to make sure you're using them to your greatest advantage.

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

The first and perhaps biggest question you should ask yourself: Is there an income gap you are trying to fill? The main purpose of annuities is to fill an income gap in retirement, and you can determine your shortfall after taking into account any guaranteed income you have, such as a pension or Social Security. For example, if you're a single individual who expects to spend $60,000 a year on retirement, but your Social Security checks will only make up $25,000 of that amount, 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 this sometimes includes an annuity. It can also be an investment account, or it can be a combination of the two.

Do you understand why this financial advisor is suggesting you put this large amount of money into one type of product? Ask this professional what problem they're trying to solve, said Eric Nelson, a certified financial planner and president of Independence Wealth. “To maximize growth, an annuity is probably not the right solution,” he said. By comparison, if you're looking for a conservative way to bring in more income, “an annuity might be a good fit,” Nelson added.

Many investors use annuities for “guaranteed income,” but your advisor suggests that you use a lot of money to buy this type of product, which could result in you taking out a relatively large sum of money each year. It's hard to get very specific about the amount of money you see each month or year from annuities without having all the terminology and variables in front of you, but if you want to be very simple about this, for example, expect a 5% distribution from 1.5 million $ of annuities, you're looking at an annual income of $75,000.

This may be more than you actually need. It's not necessarily in your financial interest to get more pension income than you actually need, as you can use that money more efficiently elsewhere. You're paying for that guaranteed income, said Burke Sistock, a certified financial planner with Rightirement Wealth Partners. Depending on the annuity, you could see a 2% or 3% fee. Conversely, you can build a strategy that involves more liquidity – such as investment portfolios, from which you can withdraw regularly. “Then they can maintain a higher investable net worth for a longer period of time,” Sestok said.

There are many types of pensions. As the name suggests, a fixed annuity will provide you with a set amount of money based on the terms you set, while a variable annuity will provide income that fluctuates based on the market. There are also many differences between the two. Annuities can 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 decide what type of retirement income might be best for them.

You'll have to do more planning before you can answer whether purchasing annuities — or this amount of annuities — is right for you. Look at your current budget, as well as what you expect to spend in the future. Consider what kind of retirement income you can expect during this time, as well as major expenses that may be unexpected (such as health care). Try to figure out what kind of income gap you might have based on all this planning. While you're at it, be honest with yourself about whether or not you might be more interested and comfortable using an alternative method of retirement income, such as investment portfolios. A qualified financial planner can help you build portfolios in a way that gives you the income you need and flexibility for the unknown.

If you decide 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 products specifically (after determining if this advisor is really looking at the big picture and working for you). Do they, for example, have an incentive to recommend this product over another?

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

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

If you're committed to your suggested amount of money, consider getting more than one annuity, and diversify the companies you get it from. “$1.5 million is a fair amount of annuity,” Pfau said. Many states have protections in case an insurance company goes bankrupt, he said, with caps around $250,000 or $300,000 in many cases. It wouldn't be a bad idea to adhere to these restrictions to get another level of protection. Also check the credit ratings of insurance companies that sell annuities, and choose only options with the strongest ratings.

Some quick notes. This advisor seems to suggest that all the money in your 401(k) plan go to annuities, in which case, first look to see if your 401(k) provider has an in-plan option for annuities, and if so Eligible for this. Sometimes, these plans are available at better rates than if you were to roll the money into an IRA and then purchase an annuity.

Also make sure you have liquid cash available outside of annuities and any investment portfolios. There are countless approaches to retirement income — and yes, it's largely a mystery — but aside from the ability to diversify your assets, look for a strategy that provides growth for the future and preservation of the present, and also gives you the ability to dip into your money if you need to.

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