Annuities are a controversial topic in the finance industry. There are those who staunchly advocate for annuities, while others criticize them harshly. Suze Orman is one such critic who is known for not being a fan of annuities. However, not all annuities are created equal, and there are circ*mstances where they do make sense. In a recent Women & Money podcast episode, Orman stated that she does not hate all annuities, and there are some annuities she believes are worth considering.
What is an annuity?
An annuity is an insurance contract that guarantees a future stream of income in return for a lump sum or a series of payments. One of the biggest benefits of annuities is that they can help ensure financial stability in retirement. By purchasing an annuity, you can guarantee yourself a fixed income that will continue for the rest of your life or for a set period of time.
While annuities may seem like an attractive option for those looking to secure their financial future, there are several downsides to consider. One of the biggest drawbacks is that they can be quite inflexible. Once you've committed to an annuity, it can be difficult or even impossible to get out of it without paying hefty fees.
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Additionally, the fees associated with annuities can be high, eating away at your returns over time. And while annuities are often marketed as a way to ensure a steady stream of income throughout your retirement, they can be complex and returns can fluctuate for certain annuities. This is why financial gurus like Dave Ramsey and Suze Orman aren't fans of annuities. However, Orman does believe that a single premium deferred annuity (SPIA) may make sense for some people.
There are several types of annuities, but the type that Orman mentions in her podcast are single premium deferred annuities (SPIA). A SPIA will have you pay a lump sum of money upfront, and in return, you receive a steady stream of income at a later time. Here are four reasons why Orman believes SPIAs are worth considering.
1. Tax benefits
Annuities provide tax benefits to those looking for a guaranteed monthly income. SPIAs allow you to make contributions to a tax-deferred account without the limitations of a 401(k) plan or IRA. These plans have contribution limits, and Roth IRAs have income limits.
Typically, the growth of a tax-deferred investment will be greater than that of a taxable investment. This is because you have more of your money working for you since Uncle Sam doesn't take his cut of it every year. You instead pay taxes on the portfolio gains when you take your money out.
2. Guaranteed rates
Interest rates on SPIAs tend to be higher than those of the best CDs and Treasury notes. These are guaranteed and cannot go below a certain minimum. SPIAs may be a good fit for those who need a higher income than what is provided by a straight interest-bearing investment.
Orman states that you should only look for SPIAs where the term for the guaranteed rates last as long as the surrender period. Surrender periods typically last seven to 10 years, and the early withdrawal penalty can be as much as 10%. You do not want to get a SPIA that only offers a high guaranteed rate for one or two years.
3. Current interest rates
The Federal Reserve's recent interest rate hikes have been the fastest cycle in over 40 years. With interest rates approaching 20-year highs, many insurance companies are offering very favorable rates that are guaranteed. This is one of the reasons why Orman states SPIAs are great options when interest rates are higher.
The perfect time to have purchased an immediate annuity, for example, with respect to interest rates, would have been in the 1980s, when interest rates were as high as 20%! You did not want to invest in SPIAs in the 2010s, when interest rates were close to 0%.
4. Benefits for older investors
Orman states that SPIAs are usually a much better choice for people who will be 59½ or older in the year that the surrender charge is up. If you are under 59½ and take distributions from your SPIA, then you will have to pay a 10% penalty on any gains. You may also have to pay state penalties. In addition, retirees are typically in a lower tax bracket than when they were working. Orman states that SPIAs can therefore take the place of CDs or treasury notes to help provide income in retirement.
Many people think that Suze Orman "hates annuities," but she concedes there are circ*mstances where they do make sense. In particular, single premium income annuities work well for those who want to have consistent income during retirement, protect their investment principal from market fluctuations, and feel that they will be in an even lower tax bracket during retirement. While annuities aren't the perfect product for everyone, if you assess your personal finances and do your research, you may find that annuities are the right addition to your retirement portfolio.
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FAQs
Suze: It's because again, an annuity is a contract with an insurance company. Suze: And annuities, all annuities are tax deferred, meaning you do not pay taxes on it while the money is in there. But when you do go to take it out, you will pay ordinary income tax on any amount of money that you take out.
Why does Suze Orman not like annuities? ›
Suze: It's because again, an annuity is a contract with an insurance company. Suze: And annuities, all annuities are tax deferred, meaning you do not pay taxes on it while the money is in there. But when you do go to take it out, you will pay ordinary income tax on any amount of money that you take out.
What does AARP say about annuities? ›
A couple that invests $100,000 in a joint-life immediate annuity when they're both 65 would receive $543 per month for their lives. You can access that money only as a lifetime income stream — there's no option for extra withdrawals — so be careful before tying up too much of your savings in an income annuity.
Why do financial advisors not like annuities? ›
A more likely story, he suggests, is that advisors are unenthusiatic about annuities, in large part because it's difficult for them to get paid on annuity assets.
Why retirees don t like annuities? ›
Insurance agents and financial advisors have been investing their clients' retirement money in annuities for decades. This practice has its detractors, with the criticism usually focusing on the high commissions paid to annuity salespeople and stiff fees charged to annuity owners year after year.
What does Warren Buffett think about annuities? ›
So does Warren Buffett love annuities like the future ads you will see from your local broker or annuity Internet promoter. The answer is a resounding NO. Warren Buffett loves only one thing ... making money, and he's still pretty darn good at it.
What is the bad side of annuities? ›
Annuities can be a bad choice for some people—they have higher fees and less flexibility than some savings options. And depending on the type you choose, your heirs may get nothing after you die even if far less was paid out than you had contributed.
Should a 70 year old buy an annuity? ›
Most financial advisors will tell you that the best age for starting an income annuity is between 70 and 75, which allows for the maximum payout. However, only you can decide when it's time for a guaranteed stream of income.
What is better than an annuity for retirement? ›
In general, 401(k) plans — and the very similar 403(b) plans offered by nonprofit organizations — are a better way to grow your cash for retirement than an annuity.
How much does a $100,000 annuity pay per month? ›
How Much Income Does $100,000 Annuity Pay Out In The Future?
| Payout period | Monthly payouts |
|---|
| 10 years | $1,102 |
| 15 years | $835 |
| 20 years | $707 |
Apr 29, 2024
Yep—if you want to get your hands on the money you've put into an annuity, it'll cost you. That's a big reason why we don't recommend annuities. Remember, annuities are basically an insurance product where you transfer the risk of outliving the money you've saved for retirement over to an insurance company.
Who should not have an annuity? ›
You may not be a good candidate for purchasing an annuity if you already have enough money saved up for retirement. If there's simply no risk that you'll run out of cash in retirement, an annuity won't provide much benefit, and it will only tie up your savings in the meantime.
Do financial advisors make money on annuities? ›
Annuities: Annuity commissions are generally built into the price of the contract. Commissions usually range anywhere from 1% to 10% of the entire contract amount, depending on the type of annuity. For example, fixed-indexed annuities generally earn advisors a 4% commission.
What is the highest rated annuity company? ›
- MassMutual. Best annuity company overall. ...
- Athene. Best for no-charge income and death benefit riders. ...
- Fidelity Investments. Best one-stop shop for annuities and investments. ...
- Allianz Life. Best for fixed index annuities. ...
- Pacific Life. Best for customer satisfaction. ...
- Nationwide. Best range of annuity options. ...
- PRUCO. ...
- USAA.
Wealthy investors can leverage certain aspects of annuities, which is one of the reasons they are popular. For example, those with a high level of disposable income can contribute to an annuity if they have maxed out their traditional retirement plans.
How much does a $50,000 annuity pay per month? ›
Payments You Might Receive From a $50,000 Annuity
If you use $50,000 to buy a fixed annuity paying 5% per year, for example, you'll earn $2,500 annually or about $208.33 per month. Deferred annuities, on the other hand, can be more complicated to estimate payments for because there are so many variables.
Why are annuities not recommended? ›
Another reason annuities are viewed as a bad financial product is because of commissions. Annuities can have large upfront commissions paid to the agent who sold it. There is little transparency to the purchaser on how much and when the agent is getting paid. The commission is baked into the fees you have to pay.
Why are financial advisors pushing annuities? ›
With an annuity—especially a fixed annuity—they know what their monthly income will be (and can budget accordingly). This saves them the task of managing their retirement portfolio, a plus for those who worry they aren't capable of managing their own portfolio.
What do financial experts say about annuities? ›
More than two-fifths recommend an annuity with guaranteed lifetime income to less than a quarter of their clients. Most professionals who do suggest annuitization recommend variable annuities with a guaranteed income rider.
Why are annuities unpopular? ›
High cost. Annuity products can be expensive. Simple immediate annuities and deferred-income annuities generally have upfront commission rates that range from 1 percent to 4 percent. More complicated products, such as variable annuities and fixed index annuities, can have upfront commissions of 7 percent or more.
