Annuities part II: stick with Suze

August 14, 11:18 AMLA Personal Finance ExaminerErik Keto

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Suze blogs financial advice on www.suzeorman.com

After writing about Viagra, scalped play-off tickets and Jim Cramer. My most controversial of topics turned out to be that scandalous product - the variable annuity. Go figure. And if there is one thing I have learned from the media, it’s give the people what they want.

A reader turned me on to the strikingly similar viewpoint I have to Suze Orman. I honestly do not watch her show nor read her column, but was happy to find out she and I are in complete agreement on this subject. Thank you to the reader who turned me on to her website, I will definitely use it as a resource in the future. Here are some excerpts from her article on annuities, with a link to the full article below.

Its think its import to note that she and I are not saying that annuities are not right for anyone, we are saying that chances are that they will benefit your broker’s wallet more than yours. We both strongly urge responsibly considering other options before settling on an annuity.

From Suze Orman’s website:

ANNUITIES

This is the great blanket investment to cover you when you're about to retire, or retired, right? Not so fast. Even though this is an investment that so many financial advisors just love to sell you, and lots of people just love to buy, more myths circle this investment than almost any other investment I know about. In some cases, annuities make sense, and in others they do not, but sooner or later someone will try to sell you these investments, so I want you to read this section very carefully. Getting into an investment is easy. Getting out is a different matter entirely.

Grace's story

When my father died, everything was left to my mom in an insurance policy. He left her $56,000, which was pretty much all she had. We were just sort of figuring this all out, when my mom started feeling really unwell, and it turned out she had cancer. The doctors couldn't tell how long she had, but they knew it wasn't very long, a matter of months or maybe a little longer. So my brother, my mom, and I went to a financial advisor, who put her into an annuity with a 10 year certain period of time. He said this would give her the highest possible monthly income. Now we knew she wouldn't live for ten years, but we also wanted her to have as much money every month as she could get. The advisor was really persuasive, and what did we know, anyway? We said fine.

My mom died just two months later, and of course she left the money to my brother and me, and again we had to sort everything out. We decided we didn't want the annuity anymore, and called the advisor again. This time he wasn't so persuasive. He said that if we cashed it in, we would only get $38,000. This was just two months later! Our so-called investment went down by 32 percent! We found out where some of that money went when my brother read the fine print more carefully. The advisor made a commission of $3000. But knowing that this was all she had, and knowing that she was ill, why would he put her into an investment that lost so much money? We still don't understand it.

Grace is right not to understand it, for it makes no sense from her standpoint. From the broker's standpoint, however, it made a great deal of sense.

There is much to know about this one investment category that so often is presented to us as a given, as if we would never want to look deeper into where our money could go instead. In the end, however, not very many of us should be investing in annuities at all. Yes, as we've seen, there are reasons why they sometimes make sense, but there are even more reasons why they mostly do not. Please be careful, as for the most part even though this is not an investment that will devastate you, this is also not an investment in most cases (SPDAs excluded) that will give you the biggest bang for your buck. When in doubt, get a second or a third opinion. Make sure the people you are getting the second or third opinion from know from the outset that they will not be selling you anything, that you just are asking for advice. Take any sales motivation out of the transaction. And look to and beyond your money to see whether you can do better.

Read the Full Article.