Mythological Suze Orman

Yes, Suze Orman is a myth, writ large.  And much of what Suze Orman says on Oprah.com is mythological.  I was especially taken aback by this post.  As far as I know, she hasn't changed her tune.  I almost hate to respond to it and thereby increase its exposure.  But I feel a professional and ethical obligation because this is dangerously harmful advice.

Q: My financial adviser suggested that I invest in index annuities. Are they safe?

Suze: I'm not a fan of index annuities. These financial instruments, which are sold by insurance companies, are typically held for a set number of years and pay out based on the performance of an index like the S&P 500. (Be advised that insurers aren't necessarily transparent about how they calculate any gains credited to your annuity.  [Yes they are.  In explicit detail]) They do offer a guaranteed return, but it can be under the rate of inflation, and there are caps on the amount of interest you can earn. Plus, if you don't want to keep an annuity for its entire term, you could lose 10 percent or more [I haven't seen a charge that high in decades] of your investment to a surrender charge. Honestly, I'd be suspicious of any adviser who wants you to go this route. Instead, I'd recommend that you stick to your workplace retirement plan, if you have that option. You can contribute up to $17,500 this year ($23,000 if you are at least 50). If you don't have a company 401(k) or you have more funds to invest, you can set aside $5,500 ($6,500 if you are at least 50) in a traditional or Roth IRA. [What if she's retiring?  Then she can't do any of that.]

I'm "not a fan of" any celebrity whose celebrity is more important to them than the innocent folks to whom they carelessly dispense flawed and incomplete advice.  "Honestly, I'd be suspicious" of anyone who isn't a fan of indexed annuities, especially these days.  Why do innocent consumers gravitate toward these financial entertainers?  This may be a clue:
https://getpocket.com/explore/item/why-do-people-mistake-narcissism-for-high-self-esteem

To be fair, let me list the True statements Suze makes above about indexed annuities:

1. ". . . sold by insurance companies" [which I suppose is intended to imply something negative]
2. They do offer a guaranteed return [the least important feature, actually]
3. it can be under the rate of inflation [yes, we can practically guarantee the fixed account return will be less than inflation.  We don't care, as I'll explain below.]
4. there are caps [yes, you're not going to get principal protection without fees or limits on benefits]
5. [there can be] surrender charge[s]  [The best contracts almost always have surrender charges.  That's how the company protects the risk pool.  A properly designed plan and allocation will not incur surrender penalties.]
6. The contribution limits were once accurate but not for 2023

But she never answers the question, "Are they safe?", instead going off on an ignorant diatribe ending in defamation of my profession.  (Which, by the way, she left in 1991 to become an entertainer.)  

My key points:

1. In the financial advisory business the key ethic is, "know thy client".  So, an ethical and intelligent response to that person's question would have been:

"Yes, they are safe- for multiple reasons -but why are you asking me?  You should be asking your adviser to explain how their recommendation fits into your overall plan, how they selected that particular annuity and what all the pros and cons are.  I know nothing about you, your goals, your financial situation and have no business telling you anything else.  But they are safe because they will protect you from the greatest retirement risks:  Longevity risk, inflation risk, sequence risk, and market risk.  But I'm neither licensed nor registered to give more than just general money advice [since 1991- see below from https://brokercheck.finra.org/search/genericsearch/grid"]

So here is my question:  Do you really feel safe taking advice from a person who isn't properly trained, licensed, registered and regulated, who knows nothing about you and apparently very little about the latest financial strategies?  Would you choose someone with 9 years of experience or four decades of experience?

2. Orman seems unaware that there are at least Two Stages to retirement planning.  Stage One is the Accumulation Phase, Stage Two is the Distribution phase.  She is stuck in Stage One.

Stage One is like a game of checkers with essentially two moves:  

• Save as much as you can every month.  
• And do it for a long time.  

But then in Stage Two it becomes a game of chess; there are many more moving parts, each with their own rules and strategies.  What if the questioner follows Suze's advice, goes all in the market and then loses another 15-20% this year?  And was planning to retire now??  Terrible advice.

She also seems unaware of functional asset allocation (Of course, that would necessitate spending a lot of time learning about the client and designing a plan.  Which doesn't work if your goal is simply mass appeal and self-promotion.).  At least these three functions must be planned for:

Most of us advisers refer to these as "buckets:

• The Liquid Asset Bucket- this is essential.  Unless you already have an emergency fund of 3-6 months' budget you have no business investing in the stock market.  I see this happening a lot right now (not among my clients):  You've put money in your 401k, have lost your job and have to raid your now shrunken 401k to meet expenses.  And pay extra taxes!
• The Income Bucket- This is the most important bucket, not because I say so but because in study after study retirement satisfaction and security are highest when the retiree has more than sufficient monthly lifetime cash flow.  The risk pooling and longevity credits of income annuities (typically supplemental income riders to indexed annuities) are virtually impossible to duplicate elsewhere.  I've put this challenge out a couple of times in the trade press:  Show me how you would guarantee equal or greater lifetime cash flow with $1.0 mil.  No responses. 
  So for now ignore everything but the orange and green boxes below.  A better alternative to this income annuity would have to guarantee more than $154,284 per year in ten years.  (Or $101,670 in 5 years of deferral.  Choose your year.)  What if the market is flat for the next 10 years like it was after 2000 (13 years, actually)?  Or lower?  If you withdrew 15.42% you would be out of money in 7 years!
  
  
  
  (the specific indexed annuity in this illustration is the IncomeShield10 from American Equity)
  
  
• The Growth Bucket-  Depending on the client and the state of the markets, indexed annuities can shine here too.  Regardless of the investment, the key is some kind of risk management.  Orman, of course, knows nothing about the questioner's current portfolio risk, rate of return needs nor time horizon.  Which is why her advice is dangerous.

Insist on evidence and understanding from anyone who gives you financial advice.  And really?  You're going to take advice from someone just because they're famous?  Bernie Madoff was famous.  Sam Bankman-Fried is famous.  Instead, use local, licensed, independent fiduciaries with a lengthy history documented with the proper regulators:  https://adviserinfo.sec.gov/individual/summary/2510814

Gary

Your Constructive Comments are Welcome!

MYTH: Annuities are a Bad Idea for Almost Everyone!

This headline precedes an extremely ignorant article by MarketWatch writer Marc Lichtenfield.  Ironically, only the first sentence is close to being true:  "You're betting the insurance company that you're going to live longer than they think you will".  Yes, of course!

But let me dissect this dangerouly stupid article line by line.  As if Wall Street is so great at comprehensive financial planning.  The truth is,

Annuities are a Great Solution for almost Everyone.

Opinion: Why annuities are a bad idea for almost everyone

By Marc Lichtenfeld

Published: Aug 18, 2018 7:56 a.m. ET

“Don’t lose money in the Wall Street casino!” the radio announcer blared.
“It could take a lifetime to make up your losses in the stock market.”
Unless your lifetime is five years — that’s how long it took the market to make a full recovery after the Great Recession — he’s dead wrong.
He was using this fear tactic to sell annuities. And getting suckered into buying an annuity with him — or any broker — could be the biggest mistake you ever make.
Marc, since the number one risk in retirement is living longer than expected and, hence, outliving one's income and assets, wouldn't income insurance make sense?  Yes, the market made a full recovery . . . as long as no withdrawals were being made.
You see, annuities aren’t wrong for everyone… Just most everyone.
I would love to do a comprehensive plan comparison, your way and my way.  Just ask any retiree how important their existing public annuities (Social Security and pensions) are to them.
If you’re unfamiliar with annuities — you give an insurance company your money and in return they pay you an income stream, usually for the rest of your life. In some annuities, if you die before you’ve received all of your money back, too bad for you. The insurance company keeps the money.
Seriously, that’s how it works.
No, that's not how it works.  Some annuities (single premium immediate annuities or SPIAs) do work that way, just like pensions and Social Security, unless you exercise survivorship and/or spousal continuation options, in which case payments can continue for the life of one's spouse.  But they are neither the most effective nor common.
Now, there are plenty of annuities where that’s not the case. Family members can receive cash back or even continued monthly income after your death — but you pay extra for that.
Now you just contradicted your last paragraph.  Oh, there are other types of annuities.  And no,  those particular benefits don't cost extra.
Essentially, you’re betting the insurance company that you’re going to live longer than they think you will. They take your money, invest it and give it back to you in dribs and drabs (with steep penalties if you want to withdraw more than the contract states).
Annuities are indeed long term vehicles which still have great short term liquidity.  10% per year penalty-free is ubiquitous.  After 5-10 years you have 100% liquidity.  Upon death, terminal illness or disability, even the short term penalties are waived.  Everyone has money that they don't need 100% liquid all the time.  Tell any annuitant that the guaranteed income they're enjoying is "dribs and drabs".  I'm not familiar with that sophisticated financial term.
Annuities are such terrible investments that the minute the government passed a law specifying that financial professionals had to act in their clients best interest, annuity sales fell off a cliff.
In 2016, new rules were passed by the Department of Labor that stated that brokers have to act as fiduciaries. That means they had to put their clients’ best interest ahead of their own.
Believe it or not, prior to the rule being passed, stock and insurance brokers could sell you anything they wanted — whether it was right for your or not. So typically, they sold whatever paid the highest commissions.
Fixed and indexed annuities are not investments.  They are insurance products.  They are regulated by state insurance departments.  Variable annuities are indeed terrible, expensive and poorly regulated investments.  The best interest statutes never stuck.  What killed sales was the requirement that all compensation, even trips, etc. be disclosed to the client.  Those of us advisors who are already legal fiduciaries comply with the best interest standard anyway, even though it was eventually thrown out.  
Annuities pay extremely high commissions — often 7% or higher of the total amount. So if a client was sold a $200,000 annuity, the salesperson might take home $14,000 up front.
Needless to say, there’s not a lot of incentive for him to put you in a low-cost index fund.
Yes, the far more virtuous stock broker or money "manager" would rather you pay 1-2% of your money every year, indefinitely.  Annuities actually pay less compensation over a 10-yr. period.  Finally, I do in fact recommend low cost ETFs for the growth portion of my clients' assets.
This new law is scheduled to go into effect this year, though that will likely be delayed.
As soon as the fiduciary rule was passed in 2016, sales of annuities fell 8%. They slid an additional 18% in the first quarter of 2017.
Sales of variable annuities, which are the worst of the worst, crashed 22% in 2016.
If these were such wonderful products, as defenders of annuities will maintain, why did so many people stop selling them — even before the law went into effect?
Those were my two best years, due to the uncertainty caused by our current awful president.  Keep in mind, too, that everyone thought they were invulnerable in the market.  Stodgy old annuities weren't as sexy.
So why do people like them?
Fixed annuities prevent losses. You are typically guaranteed that the value of your principal will not go down regardless of what the stock or bond markets do.
Fixed index annuities allow the investor to take part in some upside, though it is usually very limited — about 4% per year in this low interest rate environment. So the investor is trading upside potential for downside protection.
If the market soars 20%, the investor will only make 4%. But if the market falls 20%, the investor won’t lose any money.
More top-of-the-head opinionating without doing any research.  I had indexed annuities credit close to 20% last year.  Virtually all indexed annuities offer monthly caps of 1-1.5%, meaning you could earn 12-18% any given year.  But this misses the point.  The primary purposes of indexed annuities are income insurance & principal protection that beats other principal insured options like CDs and bank accounts.
Another way they screw you
Let’s say you take out an annuity and your circumstances change. You need the money urgently. If you’re still within the surrender period, it’s going to cost you. Big.
A typical surrender period is seven years and the surrender charge starts at 7% and falls by 1% per year.

So if after two years, you need your money back, it’s going to cost you $10,000 ($200,000 x 5% = $10,000) to get your own money back.
 This is why fiduciary advisers build income plans to prevent having to access long term money.  That's what emergency funds are for.  Wall Street shills don't seem to be able to grasp this.
Instead, take the money and invest it in Perpetual Dividend Raisers — companies that raise their dividend every year.
Yes, they did so well in 2008.  Investors spending down such account allocations would never have recovered.  This is referred to as "sequence" risk, losing money at the wrong time while you're drawing down savings.  Wall Street shills don't seem to understand sequence risk either.
But I don’t want to risk any money, you say. After all, that’s one of the most attractive features of annuities.
Annuities are typically long-term contracts. People buy them in their 60s, 70s and even 80s, expecting to collect income for years in the future.
And most do indeed collect income for years in the future, usually well beyond the "average" life expectancy used by brokers in their plans, if they've even done a plan.
Consider that over 10-year periods, the stock market has only been down seven times in the past 80 years. And those seven times all were tied to the Great Depression or Great Recession.
In other words, you had to sell in the depths of historic financial collapses to not make money in the stock market over 10 years.
Again, this ignores sequence risk.
If you invested in 2000, near the top of the dot-com bubble and sold in 2009, near the bottom of the Great Recession, you were down 9%. Not good, but not horrendous considering you endured two epic stock market meltdowns.
But what if you were having to meet your budget during that period?
Or consider this scenario… If you have the worst timing of any investor and put your nest egg into the S&P 500 SPX, +0.62%   at the absolute top in 2007 — right before the financial collapse — you’d be up 91% (including dividends) 10 years later.
Just stop and think about that the next time market naysayers talk about the “Wall Street casino.”
Securities are indeed a casino.  Where else can you lose everything?
As an industry saying goes, “Annuities are sold, not bought.”
Don’t be one of the people who gets sold.
Actually, I disagree heartily.  Annuities are bought.  By people who want principal protection, and a solution to the three greatest retirement risks:  Sequence risk- having to spend your money after or while it shrinks, Longevity risk- outliving your income, and Withdrawal Rate risk- e.g following Wall Street's 4% rule and then going broke.
A well designed income allocation plan includes market investments.  But no one should have all their money in the market, not in a well-crafted income allocation strategy.

Your Constructive Comments are Welcome!