‘My advisor insists this is a good, low-risk investment.’ I’m retiring at 63 with $2 million in savings. My financial advisor wants me to deposit half of my money in an annuity. Should I do that?

Question: I am 63 years old and retired. I have no debt. I have $2 million in my 401(k) before taxes and about $60,000 in other savings and $0.5 million in real estate. I hired a fiduciary financial advisor, my first, about five months ago. Before that, I managed my investments passively. I have determined my desired risk level for the advisor to be low. I want to avoid major market corrections like 2008 and now.

His advice is to invest 50% in ETFs they actively manage and the other 50% in an indexed annuity. As of this morning, the ETF account is down 19%. I have not invested in annuities. I’ve never been a big fan of annuities, but my advisor insists it’s a good low-risk investment vehicle. Is a variable annuity a good option for me? I don’t like the idea of ​​being forced to spend 50% of my retirement savings in 10 years. (Looking for a financial advisor? This tool can help connect you with an advisor who meets your needs.)

Answer: Unfortunately, there are a lot of warnings about the dangers that pop up here, the first being that although your advisor may call himself a trustee, he may not actually be working in the interests of the company. Your best. “In most cases, indexed annuities are sold on commission. If the advisor claims to be a fiduciary and sells the annuity, something is out of the question,” says certified financial planner Chris Chen of Insight Financial Strategists.

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Note that a fiduciary advisor will actually be paid through fee-based compensation, not product commissions, so if your advisor claims to be a trust and is proposing a the investment pays them a commission, that should be a red flag. The trust advisors of the National Association of Personal Financial Advisors (NAPFA) and other similar trust-oriented professional organizations such as the CFP Council, are committed to advising in the best interests of their clients. “One of the ways they do that is that they don’t get into conflict of interest situations such as getting paid commissions on products like annuities,” says Chen. (Looking for a financial advisor? This tool can help connect you with an advisor who meets your needs.)

Regardless of whether he is a true trustee or not, “it is unlikely that a variable annuity would be a beneficial approach here, especially for a low-cost passivation, ,” says certified financial planner Elliot Dole of Buckingham Strategy Wealth. One of the biggest downsides of variable annuity is the high costs that often come with it, including administrative fees, fund costs to invest in mutual discoveries, etc. Furthermore, Dole adds: “Beware the tough surrender schedule with indexed annuities. The structural complexity exists to benefit the issuer, not the investor.” That said, there are perks to annuities, and this The MarketWatch guide provides helpful annuity tips, as well as this one.

Other things to consider are that there are many forms of risk that your advisor should help you understand. “Ask what risks are being prioritized with this particular annuity recommendation. Does the annuity protect the value of your assets or future income streams from the annuity? Maybe the annuity has a low risk of future earnings, but what about the illiquidity risk of 50% of your retirement savings?” Kan said.

Regardless of what you decide, it is imperative that you and your advisor agree on the characteristics of a low-risk portfolio. Candent Capital certified financial planner Bill Kan says you should chat more deeply with your advisor about the reasons behind the recommendation for an actively managed ETF strategy and why the annuity is a good low risk investment vehicle.

“There is no single strategy that works in all economic periods and conditions and all sensible strategies will have their moments to shine, but it can take years for those times to arrive. Does the advisor’s understanding of low risk match your definition of low risk? History has shown that even low-risk strategies can suffer during major market corrections,” said Kan.

Given the current market position (as of when you wrote to us), a -19% result for an ETF portfolio isn’t too bad. However, Chen says, “In my opinion, you need a fiduciary advisor who really specializes in retirement planning who will probably start with a financial plan to fully understand your situation and goals. . You can find people like this at NAPFA or the XY Planning Network.” (Looking for a financial advisor? This tool can help connect you with an advisor who meets your needs.)

It is also key to consider other strategies to reduce risk, experts say. Different planners have different strategies, and Forza Wealth certified financial planner Michael DeMassa says for his conservative clients looking for good low-risk investments , “we purchased U.S. Treasuries with maturities ranging from six months to three years. The current yield to maturity is a little over 4%.”

Depending on what your portfolio looks like in terms of stocks and bonds, if the client requires a lower risk tolerance — a portfolio consisting of cash, CDs, or Treasuries Short-term US looks like a good fit, Scott-certified financial planner said O’Brien of Worthpointe Wealth Management. Indeed, by spreading CDs across multiple FDIC-insured banks, you’ll protect your principal. “CDs are paying attractive interest rates. There are now 12-month CDs that pay over 4%,” says certified financial planner Greg Reeder at McClarren Financial Advisors.

Having a problem with your financial advisor or looking for a new one? Email [email protected].

Questions edited for brevity and clarity.