I am 73 years old and my advisor told me to buy $1.5 million in pension. Do I have to do it?

Should you accept your advisor’s offer? Does this sound like good advice?

Related: I’m in my 30s with $30,000 in my 403(b). I owe $20,000 in college tuition. Raid your retirement accounts or take out student loans?

Dear readers,

Retirement income planning can feel like an overwhelming puzzle, but the pieces are there. All you have to do is make the most of it.

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

The first and perhaps biggest question you need to ask yourself is: Do you have an income gap that you are trying to close? The main purpose of a pension is to fill the income gap after retirement, and the shortfall can be determined after taking into account guaranteed income such as a pension or Social Security. For example, if you’re single and expect to spend $60,000 a year in retirement, and your Social Security check only accounts for $25,000 of that, your income gap would be $35,000. The next step is to figure out where the rest of your money will come from, and this sometimes includes your pension. It may be an investment account or a combination of both.

Do you understand why this financial advisor suggests investing so much money in one type of product? Ask these experts what problem they are trying to solve, says Eric Nelson, certified financial planner and president of Independence Wealth. “If you want to maximize growth, pensions may not be the right solution,” he said. By comparison, if you’re looking for a conservative way to earn more income, “an annuity is probably right for you,” Nelson added.

Many investors use annuities for a “guaranteed income,” but your advisor may suggest that you spend a lot of money purchasing these types of products, which will bring in a relatively large amount of money each year. It’s difficult to be too specific about how much you will receive each month or year from your annuity without considering all the conditions and variables in advance. If you expect a 5% distribution on a $1.5 million pension, your annual income would be $75,000.

This may be much more than you actually need. And having more pension income than you actually need isn’t necessarily the best thing financially. Because that money could be used elsewhere in a more efficient way. You’re paying for guaranteed income, says Byrke Sestok, a certified financial planner with Rightirement Wealth Partners. Depending on your pension, you may be charged a 2% or 3% fee. Conversely, you can build a strategy that involves more liquidity, such as an investment portfolio that can be withdrawn regularly. “Then they can maintain a higher investable net worth for a longer period of time,” Sestok said.

There are many different types of pensions. As the name suggests, a fixed annuity provides a set amount of money based on the terms you choose, while a variable annuity provides income that fluctuates with the market. There are many variations of the two. Pensions may also include riders. Wade Pfau, founder of Retirement Researcher, an educational resource for individuals and financial advisors, created an assessment tool called “Retirement Income Style Recognition” to help investors determine what type of retirement income is best for them.

You’ll need to do a lot more planning before you can answer whether buying an annuity (or any annuity for that matter) is right for you. Look at your current budget and what you expect to spend in the future. Consider any type of retirement income you can expect during this time, as well as any big unexpected expenses (like health care). Based on all this planning, find out what kind of income gap you have. And while you’re at it, ask yourself honestly whether you’d be more interested in and comfortable with alternative methods for retirement income, like an investment portfolio. A qualified financial planner can help you structure your portfolio in a way that gives you the income you need and flexibility for the unknown.

If you decide that purchasing an annuity is right for your particular situation, be very specific about our recommendations for these products and where they come from. Ask your planner why they chose these specific products (after making sure this advisor is actually looking at the big picture and working in your best interest). For example, is there an incentive to recommend this product over another?

See also: We own four homes worth $6 million and stock and collectibles worth millions of dollars. Do you have a long-term care policy or pay out of pocket?

Next, look at the product’s terms and conditions, including return periods and fees. (Many products have a seven-year return period, which means you’ll have to pay a penalty if you cancel before seven years, Sestok said.) What are the other fees and restrictions, and what are your options to access those funds? Ask yourself if there is. “One of the biggest downsides is going to be liquidity issues,” Nelson said.

If you’re sticking with the amount suggested, consider getting more than one annuity and diversifying the companies you receive your annuities from. “$1.5 million is quite a lot of money for pension premiums,” Pfau said. Many states have protections in place if an insurance company goes bankrupt, and in many cases the limits are around $250,000 or $300,000, he said. It’s not a bad idea to stick to these limits for another level of protection. Also, check the credit ratings of the insurance companies selling annuities and choose only those with higher ratings.

A few more quick notes: This advisor seems to be suggesting that you direct all the money in your 401(k) into your pension. In this case, first check with your 401(k) provider to see if they have in-plan options for pensions. You deserve it. Sometimes these plans offer better prices than putting your money in an IRA and purchasing an annuity.

Additionally, ensure you have liquid cash that you can use outside of your pension and investment portfolio. There are countless approaches to retirement income. That’s right. It’s very puzzling. But in addition to the ability to diversify your assets, look for a strategy that provides growth for the future and preservation for the present and also provides the following benefits: Ability to invest money when necessary.

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