Answers · Annuities

Why is Suze Orman against annuities?

She is not against all of them. Her long standing position separates simple income annuities, which she has spoken about favorably, from variable and indexed annuities, which she criticizes for their fees, their surrender schedules and their complexity. So the useful question is not whether she is against annuities, it is which one you were shown.

She is not against all annuities, and the headline loses that.

This question usually arrives already decided. Somebody got pitched a contract, searched her name to check it, found a strong opinion in the first result and stopped reading.

Her position, held publicly for a long time, is not a blanket ban. She has spoken favorably about plain income annuities, the kind where you hand over a sum and the payments start. Her criticism is aimed at variable annuities and at indexed annuities, and it is mostly about cost, lock up and complexity.

That distinction matters because the word annuity is not a product. It is a legal wrapper covering at least four different things that share a name, an insurance company and almost nothing else.

So her opinion cannot tell you anything until you know which one you were shown. Most people cannot say, and that is not a failure of the reader. Nobody selling the complicated version opens with the word complicated.

Four products share the word, and the criticism only fits two of them.

An immediate income annuity is the simple one. You hand over a sum, payments start, and the balance stops existing as a balance. There is no annual fee line because the cost is already inside the payout rate, which makes it the one version you can compare on a single number.

A multi year fixed rate contract is the next simplest. It pays a set rate for a set term, closer to a certificate of deposit written by an insurance company, with a surrender schedule where a bank would have an early withdrawal penalty.

A variable annuity puts your money in subaccounts that rise and fall with markets. The costs stack up: a mortality and expense charge, the fund fees inside the subaccounts, an administrative charge, and whatever any rider costs. As illustrative arithmetic, a stack reaching 3 percent a year on 200,000 dollars is 6,000 a year, and it is charged in the years the subaccounts fall as well as the years they rise.

A fixed indexed annuity credits interest off an index with a floor underneath it. The floor is paid for by a cap or a participation rate on the upside, and by the index dividends you do not receive. The cost is real and it never appears as a fee.

Her criticism lands on those last two. Applied to the first two it mostly does not fit, which is why she has not applied it there.

The strongest version of her criticism has nothing to do with fees.

Money already sitting in an IRA or a 401(k) is tax deferred by law, at no cost to you. Tax deferral is also the headline advantage on almost every annuity brochure. Buy one with retirement account money and you are paying for a feature you already own.

That argument is correct as far as it goes. Here is the other half of it, and notice who benefits from the other half. Almost nobody buys an annuity inside an IRA for the deferral. They buy it for income that keeps coming or for a floor under the balance, and an IRA provides neither of those.

But that reply concedes the point rather than beating it. If the deferral is worth zero on this money, the income guarantee has to justify the entire cost by itself, and a guarantee like that depends on the claims paying ability of the issuing insurance company. That is a much harder test than the one the brochure sets, and it is the right test.

It also hands you a clean tell. If the person across the table leads with tax deferral on money that is already in a retirement account, they are either not thinking about your situation or hoping that you are not.

Where the blanket version of the criticism goes too far.

Advice given to a general audience has to be safe for the median listener, and the median listener does not need an annuity. That makes avoid them a good default and a poor universal rule.

What the blanket version misses is mortality pooling. It is the one job with no substitute: payments that keep arriving after the money should mathematically have run out, funded by the people in the pool who did not live as long. No fund, ladder or withdrawal rate produces that, and we worked through the comparison job by job on our page about what is better than an annuity for retirement.

Who that leaves is a narrow group. Someone whose fixed monthly bills run past what Social Security covers, who has reason to think they will live a long time, and who wants that one gap closed rather than the whole portfolio rearranged.

One more thing worth saying, because it cuts against our side of the table at least as hard as hers. A verdict that survives every set of facts was not reached by looking at the facts. That applies to never buy one, and it applies just as squarely to the pitch we took apart on our page on whether annuities are a good investment right now.

We sell these, so weigh this page accordingly.

opfinances.com is a licensed insurance agency. We are not a financial advisor and not a fiduciary, and the insurance company pays us when somebody buys a contract. Read everything above with that in front of you.

She is paid by an audience. We are paid on the sale. When somebody with nothing to gain from your purchase says be careful, and somebody paid on your purchase says it depends, those two statements do not carry equal weight, and writing a fair sounding page does not make them equal.

What is genuinely useful about her criticisms is that almost none of them is really an opinion. Each one converts into a question with a number for an answer. What does this cost per year in dollars. How many years does the surrender schedule run. Is this retirement account money. What is the cap today and who is allowed to change it.

Ask us those, and ask them of anyone else who puts a contract in front of you. If the answers come back bad, she was right about your contract, which was the only question worth asking in the first place.

Related

Does Suze Orman say to never buy an annuity?

No, and that is the most common misreading of her position. She has spoken favorably about simple income annuities, where you hand over a sum and the payments begin. Her criticism is pointed at variable and indexed contracts, on the grounds of cost, surrender schedules and complexity. Whether it applies to you depends entirely on which of those you were shown.

Why is Suze Orman against variable annuities?

Mainly the cost stack and the complexity that hides it. A variable annuity can carry a mortality and expense charge, fund fees inside the subaccounts, an administrative charge and rider fees at the same time. As illustrative arithmetic, reaching 3 percent a year on 200,000 dollars is 6,000 a year, charged in falling years as well as rising ones. Ask for the total in dollars rather than in percentages.

Is it bad to buy an annuity inside an IRA?

It is not automatically bad, but it removes the product's headline benefit. IRA money is already tax deferred at no cost, so the deferral inside the contract adds nothing. That leaves the income guarantee to justify the entire cost on its own, and any guarantee depends on the claims paying ability of the issuing insurance company. If an agent leads with tax deferral on IRA money, that is a reason to slow the conversation down.

What kind of annuity does Suze Orman like?

Her favorable comments have generally been about plain income annuities rather than the accumulation products. The reason is structural rather than personal taste. An income annuity gives you one number you can compare across insurance companies, no ongoing fee line to untangle, and no cap or participation rate that somebody can change after you sign.

Are indexed annuities as bad as variable annuities?

The criticism is different rather than milder. A variable annuity's cost shows up as fees you can add together. An indexed annuity's cost shows up as a cap or participation rate limiting the upside and as index dividends you never receive, so there is often no fee line to point at. That is easier to sell and harder to compare, which is the objection.

Where this fits.

This question sits inside a bigger one. Annuities walks through the whole decision rather than this one piece of it.

On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.

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