Suze School: Fortifying Your Financial Freedom and (Again) Understanding Annuities

And I look at the veterans, and one of the things that I love doing is I love going to the cemeteries where many of them are buried and all the flags that you see put up today and you're really reminded, that that flag is blowing in that breeze and representing freedom, but then it's on their grave.

So I really, really hope that on this day where we are honoring them we are honoring their legacy that it really reminds us that freedom isn't free it's earned through the bravery, commitment, and selfishness of others if you think about it as well as ourselves. So I have a favor to ask all of you. I want you all to get out your little Suze notebooks again, hopefully they're not that little right now. And in honor of today, I want us to take 3 meaningful steps this holiday.

Besides just gaining weight and eating and doing this and celebrating. I want this holiday to be meaningful for you this weekend to fortify your steps towards financial freedom really, number one, I want to reflect on your why. Write that down. I want you to reflect on your why. To do so, I want you to write down the personal freedoms that you value most. Whether it's providing for your children. Maybe it's supporting a cause.

Or sometimes for me it's simply sleeping soundly at night, especially for KT. I want you to write them down. And then I want you to answer the question why. Why do these freedoms give you the fuel that you need to stay committed to them? Why? What does it give you? Then number 2. I want you to take just one action. That empowers you.

Pick one concise action or task. Perhaps it's automating a monthly contribution to your retirement account or reviewing your beneficiary designations or setting up that health insurance checkup or doing the must-have documents. I want you to commit to the day, to do it. As a tribute to those who gave us the chance to secure our futures, they gave up their lives for us to be secure and have a future. So I want you to take one action, commit to when that action is going to be completed.

And I want you to take it. And that is a way that we can honor those who lost their lives. And then last but not least, so these are very simple things, and you may say, Oh, Suze, really? Yeah, really, everybody. We need to stop and take time and evaluate why we do things. What do we do? How do we honor those. Especially those who remained and lost those that they loved. Cause that's part of true freedom. So last but not least, #3. I want you to honor this time right now through generosity.

Because if you think about it, everybody, Memorial Day is a time to give back. So maybe you want to consider donating to a veterans organization. Or volunteering your time to help others with things that they may need, but every act of generosity echoes the spirit of service, which is really what we're commemorating tomorrow, is it not? We are honoring the spirit of service. So that's what I want you to do today.

Tomorrow I want you to honor who you are, what you want, and those that gave up their lives for your freedom. Now let's go to Suze School. All right, I get it, everybody, so I make this simple little mention. About how for 40 years now I've been contributing money every single month to an annuity at American Express, and now it's worth almost $1 million. OK. And from that you take away, does Suze like annuities? I thought Suze hated annuities. I thought this. I thought that.

Now I want you to listen to me. Today would I be putting that money in that annuity every single month, month in and month out if I hadn't started it that many years ago? No, I would not. And the only reason that I'm continuing it is because it's got a guaranteed minimum interest rate of 5%, and I could take it out any time I want. So why not just do it and it's just part of a discipline of savings. But would I be starting that today and doing it, I would not.

So you need to understand what annuities I like, what annuities I don't like. And every single one of you is different in a different situation. So sometimes I might say I don't like this annuity, but guess what, for you it's the perfect thing. So you all have got to stop generalizing on Suze just hates annuities. Yeah, you can generalize on I hate variable annuities because I don't understand them at all, and to me, in most cases they make absolutely no sense.

But there are annuities that do make sense for you in individual situations. One thing I can say to you is it never ever makes sense to have an annuity, especially a variable annuity, within a retirement account. Now, years ago when Pacific Gas and Electric, and as you know, I did the retirement planning for them, they were having early retirement.

There was an annuity by Lincoln Benefit Life that I put all of these people's money in within their retirement account because they were under the age of 55 and we needed to do something called separate and equal periodic payments which allowed them to take money out of this account without the 10% penalty. However, Lincoln Benefit Life also gave us the guarantee of an incredible interest rate at the time, and if there were any mistakes or any single person got a 10%

charge by the government, they would cover it. But that's the only time I would have done that. There are exceptions to every rule. Shake that dust out of your heads and just be open and smart enough to know when does something apply and when does it not. So I was going to sit down today and give you a Suze School on annuities until I realized I've already done that. The 458th podcast of the Women and Money podcast on April 9, 2023.

I gave you an extraordinary Suze school, so we are going to cut that in, the parts I want you to know into this podcast. Now I'm also just going to say, hey, if you want even more information on why I hate variable annuities so much, then the 576th podcast... Which was on May 26, 2024. You can go to that one and listen to that and mark these two podcasts down so when you get confused you can just go back and listen to it and listen to it again. So are you ready now?

Here we go on your master class again on understanding annuities. All of you need to understand that I do not hate all annuities. Can you write that down in your little Suze notebook? Suze Orman does not hate all annuities. In fact, there was a time in the United States for years actually that I was the number one adviser and salesperson, so to speak. In getting people to buy single premium deferred annuities, I was putting my clients to the tune of about $20 million a year.

Obviously with a lot of people into annuities, so there are some annuities at specific times in the economy that I absolutely love. And then there are some annuities that I absolutely do not love, so you need to get that straight. There are different varieties of annuities. There are single premium deferred annuities which I tend to absolutely love in many circumstances. There are variable annuities which I tend to not love in most circumstances. There are indexed annuities which I can

be hot and cold on. I think there are better ways to invest your money. There are income annuities which if you are looking for guaranteed income specifically while interest rates are high right now and I talk about this in the Ultimate Retirement Guide for 50+, I do not have a problem with them. And then there are tax sheltered annuities which are annuities that many people, especially teachers, that's where their retirement accounts tend to go. I don't really have a problem with those either.

So we will be breaking down now every single one of those annuities and how they differ and the pros and cons of each one. Let's first start with what is an annuity. And an annuity is a contract with an insurance company. Where you are usually the insured known as the annuitant, you also usually are the owner. And the beneficiary is whoever you want the annuity to go to upon your death. Because it is a contract with an insurance company that has an insured again known as an annuitant.

The interest or the growth that your money earns is tax deferred, which means you do not pay taxes on it until you withdraw it. And when they are purchased outside of a retirement account, they are known as non-qualified annuities. Write it down. If you purchase an annuity within a retirement account, it's known as a qualified annuity.

Especially if the retirement account is a traditional retirement account, meaning it's a non-Roth retirement account or a pre-taxed retirement account, so a qualified annuity is you have never paid taxes on the money that is in that annuity. A non-qualified annuity is an annuity that you have funded with money that you have already paid taxes on. Let's talk about non-qualified annuities that are outside of retirement accounts.

All non-qualified annuities usually have the exact same laws governing them. And the laws are not only by the United States government, but they're also by the insurance company itself. Now whether you know it or not, most annuities pay a very hefty commission to the financial adviser who is selling you that annuity. There are many annuities that are issued possibly by Vanguard or other companies that do not have commissions on it.

But most do. How would you know if an annuity has a surrender charge. And a surrender charge means that you deposit, let's just say $10,000 into an annuity. And the annuity contract states that you have got to keep your money in there for at least 7 to 10 years. And if you take it out before that period of time, there will be what's called a surrender charge that you will have to pay, and the surrender charge can start at 10%. Going all the way down to 0% over those 7

or 10 years. Now why is there a surrender charge? There is a surrender charge because that usually equates to the amount of commission. That the salesperson or the financial adviser was paid to sell you that annuity if you come out of that annuity before the company that issued the annuity can get back the commission they paid to the financial adviser by the fees that are within the annuity.

They want to make sure that you are responsible for that deficit, so there are some annuities that let's say have a seven year surrender charge. And maybe if you come out before the surrender charge is up in those seven years, you could pay 7% of what you take out the first year, the second year, the 3rd year, and then maybe it starts to go

down to 5%, 4%, 3%. So by the time the insurance company has gotten back all of their fees that they paid out to the financial adviser who got their commission up front, by the way. That's when the surrender fees or charges go away. If you have an annuity that there are no surrender charges for you to come out of, that's usually an annuity that didn't pay a commission for a salesperson to sell it to you or a financial advisor. So those are.

The fees from the annuity. Also, the government comes in here where if you withdraw any money from your annuity, before the age of 59 and a half, they will charge you a 10% penalty fee. Exactly the way an IRA works or a retirement account. If you take money out of the retirement account before the age of 59 and a half, you pay unless it's a Roth, you pay a 10% tax penalty, right? The same is true with an annuity. Why is that true?

It's because again an annuity is a contract with an insurance company. And because you are the annuitant, there is an annuitant, which means an insured person. That is how they get it to be tax deferred. You have two words that you have just learned. You've learned non-qualified annuity, which means you have funded it with money you have already paid taxes on. And now you have the next word which is tax deferred.

And annuities, all annuities are tax deferred, meaning you do not pay taxes on it while the money is in there, but when you do go to take it out, you will pay ordinary income tax on any amount of money that you take out. And if you are under the age of 59 and a half, you will also pay a 10% tax penalty. Are we clear here? So there are penalties and surrender fees that are imposed upon most annuities by the insurance company itself as well as the government.

That's important for you to understand. Next, in most annuities you buy a tax deferred annuity. And it goes up and up and up and up in value and you die and it goes to your beneficiaries they will have to pay ordinary income tax on any money. That they have inherited above what you originally put in. So right now what I'm doing is I'm giving you a general overview of annuities.

And again this applies to all annuities except for income annuities normally also known as immediate income annuities where you have started income right away, but I'll get to that in a little bit. So when you go to withdraw money for yourself, you will pay ordinary income tax on any amount of money that you do withdraw. If you die and you leave your annuity to anybody when they withdraw the money, they will have to pay income tax, ordinary income tax on that money as well.

So you put in $10,000 and over the years it has gone up and up and up, and now let's just say it's worth $50,000. And you die and you leave it to your beneficiaries, your beneficiaries will owe ordinary income tax on that $40,000. And the reason that they only owe income tax on that $40,000 is that that was your earnings on the original $10,000 that you already paid taxes on in this example. Those are things that you have to understand about annuities

over all. OK, let's start with a single premium deferred annuity, one of my favorite that I really don't have a problem with, especially when interest rates are higher, and a single premium deferred annuity is exactly as its name says. In one single premium, one single amount of money.

You put it in a single premium deferred annuity, and again there's the word deferred, which means they are deferring the income tax that you will owe on the growth of that money or the interest rate that money will earn until you take it out. Especially because this is a non-qualified annuity we're talking about again you fund it with money you have already paid taxes on in one lump sum.

So you would put in $10,000 at one lump sum or $50,000 or $100,000 or whatever amount of money that you want to put in. Now normally when you buy a single premium deferred annuity. The insurance company will give you a specific interest rate for a specific period of time. It can be 1 year. It can be 2 years, 3 years, 4 years, or 5 years or more.

What you want to be careful of, you do not want to buy a single premium deferred annuity that gives you just a high interest rate for the first year that's guaranteed to you. But it has a 5 or a 7 or a 10 year surrender period, and you do not know what is the interest rate that they are going to be giving you for all the years after the first year because remember you will have in most cases surrender charges for a number of years, so you will be stuck there.

So if they happen to decide, let's entice everybody to put their money into this single premium deferred annuity. Let's just say interest rate for a one year certificate of deposit like the kind you can get at Alliant Credit Union, for instance.

Those interest rates are 5% for one year. Why not offer 5.5% or 6% for one year entice people to purchase the single premium deferred annuity guaranteed for one year even though the surrender charges may apply for seven years, get them to put their money in. And then after the first year we will lower their interest rates from years 2 to whatever the surrender period is to make up for the fact that we paid them so much more the first year than the going

interest rate. Did you hear what I just said to you? That is not what you want. If you buy a single premium deferred annuity. You want them to guarantee you the interest rate that you are going to be paid for the entire length of your surrender charge. So if you wanted to, you put $100,000 in to a single premium deferred annuity where they are guaranteeing you, let's just say 5% for all 5 years, and the surrender charge is up after 5 years. Sounds like a

good deal. All right, and you go for it, and after 5 years you decide you don't want to do another annuity and you take out all of your money. If you are under the age of 59 and a half, you will pay a 10% penalty on the interest that you've earned, and you will pay ordinary income tax on the interest that you earned. $100,000 over five years will make you about $28,000 in interest.

And if you're under 59 and a half when you withdraw, you will pay $2800 on a federal level, and there might be state charges as well, depending on the state that you live in, so you have to take that into consideration plus you will pay ordinary income taxes on the full $28,000. So single premium deferred annuities are usually far better for people who know they are going to turn 59 and a half or older in the year that the surrender charge is up.

Or they're already older and they're looking at that as a replacement for, let's say a certificate of deposit, so a single premium deferred annuity, which was my favorite to put people into, will work very well for people who are older. They want a guaranteed interest rate for a specific period of time. They want to not have to pay taxes on that money, because maybe in those 5 years before it matures or whenever the surrender period it is.

They want to not pay taxes because now maybe they're in a currently high tax bracket, and 5 years or 7 or 10 years from now, they'll be in a lower tax bracket by a lot, so they don't care and that's what they want to do. So single premium deferred annuities can take the place of a certificate of deposit or a treasury if you want it to.

And that's essentially how they work. So for those of you who have put money into a single premium deferred annuity, you have locked in a good interest rate for the exact same amount of time as your surrender charge. You understand how they work in terms of the tax penalties from the government, the surrender charges from the insurance company.

And by the way, normally you are allowed in many insurance companies to withdraw 10% a year without the surrender charge applying, but if you withdraw that 10% a year from the annuity and you are not 59 and a half, you will still have to pay a 10% penalty on that money just so you know. So as long as you understand that and you know the ins and outs of it and you know why you are doing it, I don't have a problem with that.

I just want to remind all of you, however, unlike a bank that is insured with FDIC Insurance or a credit union that is insured by NCUA Insurance, annuity companies are not insured by FDIC or NCUA. Remember, each state has its own insurance guarantee association that will provide protection for you in the event that the insurance company becomes insolvent.

So it is important that you understand that and it is important that you understand each state has its own level of insurance issued by the state guaranteed associations, but you are never ever to put more money in an insurance company contract like an annuity. That is more than what the state guarantee Association will insure you for. Right, just make sure that you understand that. So that's a single premium deferred annuity. The next type of annuity which I do not like is a variable annuity.

And a variable annuity is equal to an insurance company issuing you a mutual fund that invests in different things you usually can choose which one of those funds you want to have your money invested in. But whatever you earn on it is tax deferred. And remember we're talking about non-qualified annuities right now where you are funding them with money that you have already paid income taxes on.

So you have money that's just sitting there. It's not in a retirement account, and now you are thinking to yourself, I want to invest it and you go to see a financial advisor and maybe you're thinking you want to put it in different mutual funds or exchange traded funds and your financial advisor that you're seeing. Presents an opportunity and it sounds like this if you were to put your money into a variable annuity. Because again it's a contract with an insurance company. It's

an annuity. You will be guaranteed that you will never get back less than what you originally put in number 1. Number 2, you can change funds any time you want within the variable annuity, and you will not have to pay income taxes on it. And that this is a way for you to invest in the stock market with absolutely no risk whatsoever. That is the sales pitch for most variable annuities. Are you kidding me?

First of all, a variable annuity for them to be able to say you will never get back less than what you put in. That means that if you die, it's not like you can get it out at any time. Let's go back to our example. You put $100,000 in, for instance, the markets have plummeted. Your money is only worth $70,000. It's not like you can say to that annuity company, I want my money back, and they'll give you $100,000. No. That guarantee for you to get back the $100,000 in

this case reads like this. You will get back on your death because you are the Inuitant or the insured. You will get back. The $100,000 that you put in or the value of that annuity if the annuity at that time is higher, so whichever one is higher, you will get back that amount of money, but you have to have died to do so. Number 1. Number 2, for them to be able to guarantee you that they charge you a mortality charge of about 1.3% a year of your money. So you are

paying for that, everybody. That is not just something that a variable annuity gives you, but all right, let's just say you put in $100,000 years ago. And now it is worth $500,000 and you die and your beneficiaries get that $500,000 they are going to owe ordinary income tax on $400,000. Why $400,000 because you put in $100,000 of your own money that you already pay taxes on.

They get back 500,000, so the difference between your original deposit and a non-qualified annuity and what they get is taxable. Understand that now why am I stressing that? Because if you put $100,000 directly into an index mutual fund or ETF at a brokerage firm. And you left it there for years. While that money is growing in most cases you do not pay a penny of income tax on it anyway. However, upon your death, if it grew to $500,000. Your beneficiaries wouldn't have to pay any.

You better underline this in your notebook. They wouldn't have to pay any income tax on that whatsoever. Why? Because when they inherit it from you, they get a step up in cost basis. If it goes from 100,000 to 500,000, they inherit it. Their cost basis now is 500,000. If they turn around and they sell it, absolutely no income tax at all if they sold it for 500,000. If they keep it, let's just say they do. And now it grows to 600,000 or 700,000, and they

decide to sell it. Hey, if they kept it for at least a year, they'll pay capital gains tax on whatever increase above the 500,000. But let's talk about you. Forget about when you're dead. Let's talk about right now you are alive and you want to be able to use this money while you are alive. So you simply take $100,000 that you've already paid taxes on and you put it in a brokerage firm where you buy.

An index fund or ETF, OK, just that simple like the Vanguard Total Stock Market index fund or ETF that I've been talking about now for all 3 or 4 years on this podcast, and you put in $100,000 and now years later it's worth $500,000. Any money that you take out that's been in there for over one year, you are only going to pay capital gains tax on that money. That is a big difference, everybody, than paying ordinary income tax on the money that you

withdraw from a variable annuity. Oh, and what else? There is no surrender charge. There is no 10% federal tax penalty if you take money out before you are 59 and a half years of age. There is no mortality charge of 1.3% like there is in a variable annuity. In fact, there are many index funds that don't charge any fees to buy or expenses anything in them whatsoever. So more of your money goes

to work for you. This sales pitch and I underline sales pitch... of a variable annuity allowing you to invest and be guaranteed that you will get all of your money back number one costs you. If you leave your money in there for a long period of time, chances are your money would have come back anyway and had grown to be far more. And you would just be better off buying a mutual fund or exchange traded fund outside of a variable annuity.

And remember, variable annuities also come with what surrender charges in most cases, and if you take money out before the age of 59 and a half, the 10% penalty by the government and in all circumstances, whatever money you take out. Or your beneficiaries take out will be taxed as ordinary income. Indexed annuities. They are a type of annuity that is linked to a market index such as the Standard and

Poor's 500 index. So they offer you the potential to get higher returns than fixed annuities, for instance, providing some protection against market risk. Why is that? Because they usually will guarantee you a minimum. Return that you will get a year on your money. But for that minimum guaranteed return. If your annuity is indexed, let's say, to the Standard and Poor's 500. If the Standard and Poor's 500 index skyrockets, and it goes up, let's just say 10%.

The most you may make on that annuity would be maybe you know 9%, so usually they only give you 70, 80%, 90% of what the index does, but for you giving up some return on the index, they usually guarantee you a minimum return on your money. Many people like indexed annuities. All right, you can do that if you want. They have less risk than a variable annuity, truthfully, but what people don't like about them

usually is they can be very complicated to understand. But hey, if that's something that you want to do, you absolutely can do that. Next, most non-qualified annuities also can come in the form. Of income annuities, usually immediate income annuities, where you take a lump sum of money, the insurance company invests it for you, and they guarantee you a monthly income for either the rest of your life or a period certain, so they will certainly pay you for, let's just say 10 years.

Which means that if you buy an immediate annuity and you die in the next year after you bought it, they will pay your beneficiaries for let's say 10 years, but after that it stops. If you live past 10 years, they'll continue to pay you for as long as you are alive.

I talk about these in some detail in the ultimate retirement guide for 50+ because for those of you who just simply want a guaranteed income for the rest of your life because you don't have it anywhere else and you want to know that I do not have a problem with you doing that right now. Just look at the ins and outs of them. So now let's go to qualified annuities, which means you are funding them within normally a retirement account with money that you have never paid taxes on.

A retirement account is the type of account where everything in there is tax deferred. So what sense does it make, for instance, for you to put money in a tax deferred account like a retirement account and purchase a variable annuity, for instance, that is also tax deferred. What sense does it make for you to put a tax deferred investment in a tax deferred account? It makes absolutely no sense whatsoever.

If you want to put a fixed annuity within a retirement account again, if it's guaranteeing you a really high interest rate for the exact time that it's in there and you know you're not going to be taking money out, I don't have a problem with that. But a variable annuity where they are in essence again putting your money into what mutual funds.

And you are paying mortality charges and so forth and possible surrender fees and things like that that makes absolutely no sense if you are in a retirement account. Why not just buy mutual funds, exchange traded funds, not have any limits as to when you can take money out, when you can't take it out. So variable annuities within a retirement account is absolutely in my opinion, just stupid, everybody.

Tax sheltered annuities TSAs are usually qualified annuities where if you are a teacher or something like that where you work, that's where they put your money. If that's the only retirement choice you have again, I don't have a problem with that. If, however, you have other choices at your place where you work, such as a Roth retirement account or whatever, I think there might

be better ways for you to invest your money. But if all you have offered to you is a tax sheltered annuity, I don't have a problem with that. So that is my summation on annuities. Now I know I went a little long here, but I think it was worth it. So just in summary, truthfully.

I don't hate all annuities. Don't think that you have made a mistake, especially if you're doing a single premium deferred annuity, and you can get a really high interest rate now guaranteed for the entire time that your surrender charge is in place. Make sure you know the insurance limits at your state of how much you can put in. Other than that, I think this should have given you a good education on how annuities work.

Well, did that help you? I hope so. The main thing I want you to take away from today is this. There's no such thing as Suze hates everything. Suze loves everything. Personal finance is personal to every single person, so don't try to take somebody else's advice and make it be beneficial for you. Take the time possibly to write into the Ask Suze SUZE podcast at gmail.com. Ask your question there, and if KT chooses it, we'll answer it on the

podcast and you just never know. Also, start watching my YouTube channel. You know, my official one. I think you'll enjoy it. So just stay in tune with the Women and Money podcast and really hopefully you will listen every single week. Now before I sign off today. May 25th is a really, really important day in my life, and let me tell you why. I don't know whether it was 20 years ago or more than that or just around there, but a woman by the name of

Carla Fried entered my life. She had written a letter saying she would like to write with me, and KT, in her wisdom, read the letter. We were in San Francisco and invited Carla over. And again, to KT's wisdom, she was hired to be my co-writer on everything that I was doing, articles for Oprah, articles for Costco, books, everything. And to this day she is still my co-writer.

And without her, honest to God, I don't know if we would have been as prolific as we've been written as many number one New York Times bestsellers as we have, and I refuse to stand here and take credit for absolutely everything that we have ever published when the truth of the matter is she has been with me word by word and sometimes knows my words so much that she can just write them without me being there. So Carla, I wish you a very, very happy birthday.

I have no way to express my gratitude towards you for your integrity and always being there for me, and today I know is your birthday. But today you and every day are truly my gift. All right, everybody, until Thursday when Miss Travis joins us again for an Ask KT and Suze anything, there's only one thing that I want you to remember. And it's this people first, then money, then things. Happy Memorial Day. Bye bye now.