If a financial advisor ever recommends that you buy an annuity, you should immediately seek a second opinion. Nobody hates annuities more than Suze Orman. Suze believes that annuity salespeople prey on fear, especially of the retired. Moreover, Suze thinks it is the worst investment that you can make.
In rare circumstances, I believe a small allocation into an annuity might fit into a financial plan. This buyer doesn’t care about leaving an inheritance and they could benefit from more discretionary income. Otherwise, I do not recommend annuities for the following reasons:
- They are complicated products that can be confusing to the buyer. Even the sellers of many of these annuities don’t understand the features. Last month, MetLife was levied a near-record $25 million fine for errors in understating the value of replacement contracts. According to the Wall Street Journal, MetLife said that the company’s registered representatives weren’t provided “adequate training or guidance on how to conduct a comparative analysis” of products and that “deficient systems and procedures” were evident. If the salesperson doesn’t understand the product, there is no way for the buyer to grasp how the product works.
- The surrender fees often start at 7% and there is no liquidity.
- The sales commissions for annuities are very high and range between 6% to 7%. Most financial advisors wouldn’t sell many of these poorly designed products unless they received this huge commission.
- Annuities are terrible from a tax standpoint. They are not subject to the long-term capital gains rate; rather, they are subject to ordinary income taxes.
- The time to lock into a fixed guaranteed income is not when interest rates are near historical lows and inflation could be on the rise.
- The guaranteed withdrawal benefit (GWB) that is sold as a benefit is really a gimmick. At the age of 65, a variable annuity offers a 5%-6% guaranteed lifetime income. This guaranteed withdrawal income is based on nothing less than a life expectancy calculation. If an annuity holder lives well beyond their average life expectancy, they can beat the annuity company but their heirs most likely will receive no inheritance. If the annuitant dies early in retirement, the annuity works in the favor of the annuity company.
I offer second opinions for anyone seeking advice before they make an annuity purchase. I will most likely tell you the reasons why not to buy it. There are many other investments that you can make that offer above average dividend yields with the potential for gains. Yes, the market risk will be higher, but a well balanced portfolio can help to diversify away some risk. Diversification does not prevent losses, but it will help to hedge against inflation and can create a more stable income stream.
If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to email@example.com.
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Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.
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