"‘Avoid Purchasing Investments from Friends’ — Suze Orman's Candid Advice on Indexed Annuities"

Investing Advice from Suze Orman

• Warning Against Indexed Annuities: Personal finance expert Suze Orman cautioned against purchasing indexed annuities, particularly when recommended by friends, as these suggestions may be motivated by sales commissions rather than the investor's best interests.
• Case Study of a Listener: Orman addressed a 75-year-old widow named Betty, who was advised by a friend to invest in an indexed annuity. Orman firmly advised against this, highlighting that a $50,000 investment could yield the friend a commission of $2,500–$3,000.

Understanding Indexed Annuities

• Product Overview: Indexed annuities are insurance products that link growth to a market index, like the S&P 500, but do not directly invest in the market. They offer interest based on index performance with certain limitations.
• Key Features:
  • Participation Rate: This determines the percentage of the index's gain credited to the account, typically ranging from 80% to 90%.
  • Rate Cap: This is the maximum return possible in a given period, which can limit earnings even if the index performs well.

Risks and Limitations

• Limited Gains: The structure of indexed annuities means that investors may not fully benefit from market upswings due to participation rates and caps.
• Potential Fees: Accessing funds before the surrender period, which can last up to 10 years, may incur penalties.
• Inflation Concerns: Guaranteed rates may not keep pace with inflation, risking the purchasing power of the investment.
• Insurer Reliability: The strength of an annuity is tied to the financial stability of the issuing company, with state guaranty funds providing some protection.

Recommendations for Retirees

• Simpler Investment Options: Orman suggests that retirees like Betty, who have stable income sources, should consider simpler investments such as low-cost index funds or ETFs that track the S&P 500, rather than complex products like indexed annuities.
• Consulting Financial Advisors: Before making any investment decisions, Orman emphasizes the importance of consulting a qualified financial advisor to evaluate the pros and cons in relation to retirement goals.