Is Suze Orman Off the Mark on Annuities?
Suze Orman is a household name for personal finance. She has published many financial books, and millions of listeners tune into her interviews and radio shows. If you have ever heard Suze talk about annuities, you may wonder whether her annuity opinions are on the mark or are a nothingburger.
Yes, opinions are subjective, but even the self-styled “Money Lady” gets it wrong on annuities, especially fixed index annuities. That does a disservice to retirees and those planning for retirement. Ultimately, it limits their options that could help them reach their financial goals: paying them reliable monthly income, giving protection against market risk, offering guaranteed growth above what various fixed-interest assets may earn, and providing other benefits.
Another issue with Orman’s anti-annuity stances is that they often capture only part of the picture of a specific annuity kind or feature. Just like other financial products, annuities come in many flavors, and each one has its own strengths and purpose.
In this article, we will focus on Suze Orman and her public statements on fixed index annuities — and how these opinions miss the mark on how the unique guarantees of these products can help people in retirement.
The Purpose for Fixed Index Annuities
“In their struggle to keep up with mutual funds, around 1994 the insurance industry introduced another new kind of annuity, the Indexed Annuity. The reason for this new product was the life insurance industry’s desire to capture some of the money that was pouring into index mutual funds. These funds track various market indices such as the Standard and Poor’s 500 index.”
– Suze Orman writing on annuities on SuzeOrman.com
Actually, fixed indexed annuities were created in the 1990s to be a better alternative to bank CDs, fixed annuities, and other low interest-earning assets. Retirement savers were frustrated at poor interest rates offered by these products given the then-low interest-rate environment.
The bond market collapse in 1994, in which the Fed hiked interest rates to 1.5%, left many fixed-income investors off-balance. Bond fund returns were poor, and the prior high interest rate days of fixed annuities soon ended.
In response to the growing demand for something better, life insurance companies began to innovate. The first fixed indexed annuity in the U.S. came when the insurance company Keyport Life introduced the first product in 1995. Genesis Financial of Canada was a partner in this new offering.
Keyport explored the possibility of using a few cents in every dollar of fixed index annuity premium to buy call options and give the potential for higher growth than what you might get with a fixed annuity. Other life insurance companies soon followed suit, as they saw the success of the fixed indexed annuity and its rapid growth in popularity.
Interest rate conditions are different now, but fixed indexed annuities are still designed to fill their original purpose of offering potentially higher interest earnings. These rates often exceed those of other kinds of fixed-interest instruments. But they weren’t – and aren’t – designed to compete with the returns posted by stocks and other equity-based assets.
A fixed indexed annuity isn’t a security (investment product), nor is it meant to be. It’s an insurance contract that offers the benefit of being a tax-advantaged retirement savings vehicle. You can also receive from the annuity a guaranteed lifetime income stream, regardless of what market conditions might be.
Comparing Fixed Index Annuities and Mutual Funds
“Why wouldn’t it be better simply to invest in a mutual fund that buys the entire index and get 100% of the return? For some people, it would be better, but for others who do not want to take any risk at all this indexed annuity might be better.”
– Suze Orman writing on annuities on SuzeOrman.com
Placing fixed index annuities in the same boat as mutual funds fall flat in many ways. For one, it’s not an apples-to-oranges comparison.
A fixed indexed annuity isn’t a security. It’s an insurance product that, again, may grow more in value than what other types of fixed-interest instruments can reach. According to Wink, a market intelligence firm on annuities, a fixed index annuity is intended to earn 1% – 2% above what a fixed annuity earns for a given period of time. So, if a fixed annuity has an annual guaranteed rate of 3.5%, then the fixed index annuity may earn 4.5% – 5.5% also in a year. Again, that isn’t a for-sure but just a back-of-envelope tip for the annuity’s growth potential.
When used properly, some roles for fixed index annuities are tax-deferred growth, protection of principal, and guaranteed lifetime income. Some annuity owners who can’t medically qualify for life insurance use fixed indexed annuities to grow their estates and leave a legacy to heirs. Annuities may also be used to fund long-term care expenses, again due to underwriting requirements for other insurance-based solutions.
Comparing the growth of fixed indexed annuities to market-based investments will create fundamental misunderstandings that can lead to disappointment later on. Again, it’s not meant to compete with market returns of stocks and other similar investment products.
Fixed Index Annuities and ‘Downside Risk’
“In many indexed annuities, you do not participate in any downside risk.”
– Suze Orman writing on annuities on SuzeOrman.com
This statement is wrong for a few reasons. “Downside risk” can make people think of a fixed index annuity as an investment product – and again, it’s not. Nor is the “many” language accurate. In fact, all fixed indexed annuities have a floor of protection against index losses.
When your annuity’s index goes down in value in a certain period, you are credited with zero interest for that timespan. Your principal and the interest you earned in previous crediting periods are locked in. This protective feature is built into all fixed indexed annuity products, and it has been there since these products first came about.
Blanket Write-off Statements About Fixed Index Annuities
“I’m not a fan of index annuities. These financial instruments, which are sold by insurance companies, are typically held for a set number of years and pay out based on the performance of an index like the S&P 500. (Be advised that insurers aren’t necessarily transparent about how they calculate any gains credited to your annuity.) They do offer a guaranteed return, but it can be under the rate of inflation, and there are caps on the amount of interest you can earn. Plus, if you don’t want to keep an annuity for its entire term, you could lose 10 percent or more of your investment to a surrender charge. Honestly, I’d be suspicious of any adviser who wants you to go this route. Instead, I’d recommend that you stick to your workplace retirement plan, if you have that option. You can contribute up to $17,500 this year ($23,000 if you are at least 50). If you don’t have a company 401(k) or you have more funds to invest, you can set aside $5,500 ($6,500 if you are at least 50) in a traditional or Roth IRA.”
– Suze Orman writing on annuities on Oprah.com
There are many misnomers in Orman’s description of fixed index annuities here. First of all, saying that she “isn’t a fan” of them and that they “are sold by insurance companies” are short-sighted.
“Not being a fan” of them is a tunnel-vision statement that lack any context for the financial situation of someone who might be exploring an annuity. Saying that they are “sold by insurance companies” reads like it’s supposed to be a negative. However, insurance companies are in the risk management business and help millions of people with maintaining financial security.
The danger of painting with a wide brush here is that it can lead people away from fixed index annuities, and they might otherwise benefit from their specific contractual guarantees.
Moreover, Orman focuses heavily on fixed index annuities in terms of growth. This misses the mark entirely on the value of this type of annuity in retirement, when someone is in the distribution phase of life. At that point, growth doesn’t matter as much as dependable income streams.
Most annuity buyers are in their 50s to 70s. In this stage of life, preservation and distribution of assets for retirement are the crucial factors. A fixed index annuity can pay someone an ongoing income stream that lasts as long as they may live, something which, again, Orman completely leaves out.
Some Final Thoughts on Suze Orman and Annuities
Orman is a widely-known celebrity financial commentator, but there are risks to heeding one-size-fits-all financial advice such as hers for your personal situation. Leaving annuities, particularly fixed index annuities, out of the picture leaves you with fewer options to enjoy a secure retirement income and a comfortable retired lifestyle.
Depending on your needs, goals, and circumstances, having some guarantees can help with the foundation of your retirement financial plan. Consult your financial advisor today for more information on fixed indexed annuities and whether they are right for you.
What if you are looking for someone to ask more about these annuities, what they can do, and about your financial situation in general? You may want to work with someone who is independent and not beholden to any one parent financial company (and therefore can offer you limited options for solutions). If talking with an independent financial professional sounds appealing to you, many independent and experienced financial professionals who understand annuities can assist you here at SafeMoney.com.
Use our “Find a Financial Professional” section to connect with someone initially. You can request a complimentary appointment to ask your questions and discuss your goals as well as situation. Should you need a personal referral, please call us at 877.476.9723.
