Suze Orman's Retirement Wake-Up Call: Variable Annuities Could Be Draining Your Savings

In a recent episode of her “Women and Money” podcast, Suze Orman warned about the pitfalls of variable annuities. While she acknowledged the value of certain types of annuities, variable annuities have emerged as a significant source of concern among her callers, leading her to dub them one of the biggest challenges for those seeking financial advice.

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A variable annuity is a contract with an insurance company that allows the annuitant, or account owner, to assume the investment risk. You can choose where to invest your money: stocks, bonds, or another account. 

Orman strongly advised against variable annuities because they often come with high fees, complex structures, and tax inefficiencies, which can significantly drain your retirement savings. She explained that while the money grows tax-deferred, you must pay ordinary taxes once you withdraw from the account. Plus, the beneficiary also must pay those taxes if the annuitant dies.  

"It makes absolutely no sense for you to put a tax-deferred investment such as an annuity within a tax-deferred or tax-free retirement account," Orman stated. "Almost in 99% of the cases, it makes no sense to put an annuity within a retirement account."

Orman isn't against all annuities. She stated that single premium fixed annuities, where a lump sum is deposited with a guaranteed minimum interest rate over a set period, and indexed annuities linked to the stock market offer more predictable returns and lower fees than variable annuities. 

An alarming aspect of variable annuities that Orman pointed out is the array of fees they can come with, like mortality and expense risk charges, which can range from 1.2% to 1.5% annually and erode investment returns over time. 

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Orman recounted when one of her callers put $295,000 in a variable annuity from her parents' retirement, and the fees were over $4,000 yearly. The daughter reached out to the insurance agent to understand the true value of the annuity, and the response she received was, "If your parents take the money out right now, there still is a 10% surrender charge after 11 years of being in this variable annuity. And all they would get back is $50,000 above their original deposit."

To break this down, the annuitants, or the parents, initially deposited $295,000. 

If they surrendered the account after 11 years of holding it, they would receive $50,000 of growth. However, they would have to pay the 10% surrender fee.

If they chose not to surrender the account, they would be paying $4,000 per year in fees to hold onto the account. 

Orman mentioned having several correspondences with this woman, and ultimately, the numbers showed that they should just surrender the account, take their money back, and invest it elsewhere. This is just one example of several callers who have similar issues with variable annuities. 

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"Number one rule," Orman said, "Under no circumstances…should you be buying a variable annuity, or really any kind of annuity, within a retirement account."

While there is appeal in having a fixed income in retirement from an annuity, the pitfalls of using a retirement account to pay for the annuity outweigh the pros, according to Orman. She explained that annuities can be a great investment if you have money outside retirement accounts that you want to grow tax-deferred.

Orman is a certified financial planner (CFP) who makes a point of taking continuing education courses to maintain her license and continue providing her listeners with financial education and advice. 

As you contemplate the best investments for your retirement, whether that's fixed or variable annuities or another type of account entirely, consider using the services of a qualified financial advisor to aid you in your quest for the best financial future. 

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