Financial expert Suze Orman recently advised against using a 401(k) to purchase a lifetime annuity in response to a listener's question on her "Women & Money" podcast. The listener, Deb Johnny, shared that she's in her mid-50s, recently retired, and considering buying a single premium immediate lifetime annuity with her traditional 401(k) balance to generate predictable income. Orman was quick to discourage the idea, citing concerns about inflation and long-term financial growth.
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Why the Listener Considered an Annuity
Deb explained that she has about $3 million in assets and is single with no dependents. Of that, $650,000 is in her 401(k) — $500,000 in a traditional 401(k) and the rest in a Roth 401(k). She was thinking about using the traditional 401(k) balance to purchase a lifetime annuity that would provide $2,800 per month in guaranteed income. This would cover over 50% of her monthly expenses and allow her to avoid drawing down her brokerage account too quickly.
Deb planned to start taking Social Security at age 70 and viewed the annuity as a way to bridge the gap and secure predictable income in the meantime.
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Why Orman Called It a “Really, Really Bad Idea”
Orman immediately pushed back on the plan, stating, "I think it's a really, really bad idea." Her main concern was that the $2,800 monthly payout would remain fixed for life, which means it wouldn't keep pace with inflation.
"That 2.8 is not going to change for the rest of your life," Orman said. "What do you think it's going to be worth 20 or 30 years from now? What do you think your expenses are going to be 20 or 30 years from now?"
Orman explained that while predictable income might seem appealing, the bigger risk is that Deb would lock herself into a fixed payment while expenses rise over time due to inflation. This could create a financial shortfall in the future.
The Importance of Growth
Instead of using her 401(k) to buy an annuity, Orman advised Deb to focus on investments that offer long-term growth potential. "You need to keep up with inflation and you need growth," she said. Orman suggested investing in dividend-paying stocks as a way to generate income while also allowing her assets to grow over time.
At Deb's current age, Orman stressed that protecting and growing assets should take priority over securing a fixed income. "If you told me you were 69 and you wanted to do it, I’d think about it," Orman added, implying that a lifetime annuity might make more sense closer to the typical retirement age.
What This Means for Retirees
Orman's advice highlights the importance of balancing predictable income with long-term growth in retirement planning. While annuities can provide security, locking in a fixed payment too early could create problems down the road if living expenses rise significantly.
For those considering similar financial decisions, Orman's advice underscores the value of maintaining flexibility and seeking investments that grow over time rather than focusing solely on guaranteed income. Consulting with a financial advisor can help retirees evaluate their options and create a plan that balances security and growth.
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