When it comes to investing, even well-intentioned advice from a friend can steer you down the wrong path. That's the message personal finance expert Suze Orman delivered on a recent episode of her "Women & Money" podcast, where she issued a sharp warning against purchasing indexed annuities — especially when the recommendation comes from someone close.
Suze Orman's Advice: Don't Mix Friendship and Finance
On the podcast, Orman responded to a listener named Betty, a 75-year-old widow who described herself as financially cautious. Betty explained that a friend had suggested she purchase an indexed annuity, claiming it was safe and a smart investment. The funds would come from cashing in her short-term U.S. Treasuries.
Don't Miss:
- Would You Have Invested in eBay or Uber Early? The Same Backers Are Betting on This Vacation Home Platform
- Kevin O'Leary Loves ‘Wonderful Recurring Cash Flows' — These Small Industrial Assets Deliver Just That
Orman's response was immediate and firm: "Don't you ever — anybody — buy an investment from a friend."
She emphasized that such recommendations are often driven by sales commissions rather than the investor's best interests. In fact, she noted that a $50,000 indexed annuity would likely yield Betty's friend $2,500–$3,000.
Betty said she's been retired for 11 years and is enjoying her life, with a diverse income from Social Security, a pension, required minimum distributions, and interest from Treasuries. In Orman's view, adding an annuity to this mix made little sense.
What Is an Indexed Annuity?
An indexed annuity is essentially an insurance product that ties its growth to the performance of a market index, like the S&P 500. Instead of investing directly in the market, the insurance company credits your account with interest based on how that index performs.
Trending: An EA Co-Founder Shapes This VC Backed Marketplace—Now You Can Invest in Gaming's Next Big Platform
The catch is that the growth is limited. Two key rules determine how much you actually earn:
- Participation rate: This sets the percentage of the index's gain that gets credited to your account. For example, if the participation rate is 80% and the index rises 10%, you'd only see an 8% gain. According to Investopedia, most contracts fall in the 80% to 90% range, though they can be lower.
- Rate cap: This is the maximum return you can earn in a given period. Even if the index goes up 15%, a 4% cap means your credited interest stops at 4%.
One of the big selling points of indexed annuities is that your original investment — the principal — is protected. Even if the market takes a dive, your account won't lose value, and most contracts guarantee at least a small minimum interest rate, typically between 0% and 3%.
The Potential Drawbacks
On paper, indexed annuities sound like a safe way to get some market-linked growth without risking your savings. But there are trade-offs to be aware of:
- Your gains are limited. Participation rates and caps mean you won't capture the full upside in a strong market.
- You could face steep fees. If you need access to your money before the surrender period ends — which can last as long as 10 years — you'll likely pay a penalty.
- Returns may lag inflation. The guaranteed rates sound reassuring, but if they don't keep up with rising costs, your purchasing power could shrink over time.
- It depends on the insurer. An annuity is only as strong as the company backing it. If the insurer runs into financial trouble, your money could be at risk, even though state guaranty funds provide some protection.
See Also: Kevin O'Leary Says Real Estate's Been a Smart Bet for 200 Years — This Platform Lets Anyone Tap Into It
Why Orman Says ‘No'
For retirees like Betty, who already have reliable income streams, Orman argues that indexed annuities add unnecessary complexity and costs. Instead, she recommends straightforward market investments, such as low-cost index funds or ETFs that track the S&P 500.
"If you want to invest in an index, then just buy the Standard and Poor's 500 index, by the Vanguard, the VOO ETF, and that would be far better," Orman advised.
The Bottom Line
Indexed annuities can offer guaranteed protection and some market-linked growth, but they come with limitations that may not suit every retiree. As Orman made clear, the decision to buy should never be based on pressure from a friend — especially when commissions are involved.
Before committing to any annuity or investment, it's best to consult a qualified financial advisor who can help weigh the pros and cons in light of your retirement goals.
Read Next: From Chipotle to Red Bull, Top Brands Are Already Building With Modern Mill's Tree-Free Wood Alternative — Here's How You Can Invest Too
Image: Shutterstock
