David McKnight takes a closer look at Suze Orman’s take on annuities – and at why she recommends her audience avoid them at all costs.
Suze Orman labels the 5.4% compounded annual rate of growth one of her audience members (Janet) has had over the last six years as “horrific in today’s market.”
David believes that the main issue with Suze Orman’s approach is that it engages in a classic case of apples to oranges comparison.
According to David, index annuities are a bond alternative and were never meant to be a stock market replacement.
David makes the case for index annuities performing far better than bonds – with a lot less risk.
The average return on corporate bonds is between 4% and 5%, the one for treasury return is 3-4%, while the average return on municipal bonds is 2.12%.
In David’s opinion, Janet should only feel bad about her 5.4% return over the 6 year time frame if the advisor who sold it to her sold it as a stock market alternative.
Suze Orman’s audience member Janet purchased a so-called non-qualified indexed annuity, which tends to get a “last in, first out” treatment for tax purposes.
David isn’t big on non-qualified annuities for the fact that a person purchasing them will have to pay tax on the growth before they’re able to access the principal tax-free.
Another flaw in Orman’s assessment: she doesn’t tell you that you can hold an annuity in an IRA and pay ordinary income, or you can hold an annuity in your Roth IRA and pay no taxes at all…
Something financial gurus like Suze Orman have in common: they DON’T have the luxury of nuance.
Dollars earmarked to retirement accounts generally have a 10% penalty when you access them pre-59 and a half.
David points out how Suze has wittingly demonized all forms of annuities – even the IRA and the Roth variety.
While Suze is right saying that most annuities have surrender charges, she misses the entire point of why people usually get annuities: to get a guaranteed stream of income they can never outlive.
401(k) has a surrender charge that’s far more punitive than any annuity David has ever seen.
Mentioned in this episode:
David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track
DavidMcKnight.com
DavidMcKnightBooks.com
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David's Tax-free Tool Kit at taxfreetoolkit.com
Suze Orman
Standard & Poor’s 500 Index
USA Today
