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Q&A with Suze Orman
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LINDA, YOU NEED A smart place to save, not
invest. There’s a very big difference. An investment is
something you do not need to touch for at least
seven to 10 years, and ideally much longer.
KIE TH LATHROP
With a long time horizon, stocks are a good
investment: You have time to ride out market rough
patches, which brings an opportunity to earn more
when the markets rise. But you never want to invest
in stocks or other volatile investments for your
Your main goal is to keep your money safe. That
means a bank savings account or a money market
Thanks to more than two years of the Federal
Reserve raising its benchmark short-term interest
rate—the federal funds rate—you can earn nearly 5
percent in a safe savings account.
Money market deposit accounts and money
market mutual funds will give you the most flexibility: You can write checks against the account at any
time, though often a minimum check amount of
$200 or so is required.
Here’s one investment
you should avoid
What’s the best way to invest $5,000
or more in an account that could be
accessed quickly in case of an emergency?
I am 58.
—Linda Katrick, via fax
out while you are alive, there’s no guarantee you’ll
get at least your original deposit back.
Even worse is that the supposed tax advantage is
really an albatross. Sure, your money grows tax
deferred while it is invested. But if you withdraw it,
you are going to owe income tax, not capital-gains
tax, on your earnings. The highest income-tax
bracket is 35 percent; the highest capital-gains rate is
15 percent. See my point?
You can easily create a tax-efficient investment
on your own: Invest in index mutual funds and
there’s little likelihood you will be hit with a tax bill
until you sell. To guarantee there’s no tax bill, opt
for an exchange-traded fund (ETF), which is an
index fund that trades like a stock. Then, when you
do sell, you will simply owe capital gains on your
earnings, as long as you have owned the index fund
or ETF for at least a year.
Let’s think about your kids for a minute. With a
VA, if they withdraw all the funds immediately
upon inheritance (which most kids do), they will
owe tax on all the earnings. With a mutual fund or
ETF, if they withdraw all the funds immediately they
probably won’t owe a penny of tax.
To learn more about why I dislike VAs, check
out the “Resources” page at
My financial planner wants to put a large
sum of my money ($400,000) in a flexible
premium variable annuity. I am a bit skeptical and am not real crazy about the large
( 6 percent to 8 percent) surrender charges.
What are your thoughts?
—Sandy Sandweg, San Diego
I am 65 and my husband is 69, and through
bad investments we lost everything and are
now renting an apartment. We get $1,650 a
month from Social Security; I can get my
hands on about $20,000. Should we try to
buy a home? Or maybe lease?
—Jacqueline Hart, Atlanta
HOW CAN I SAY this politely? Actually, I can’t. So
let me just be blunt: This is horrible financial
advice. Variable annuities (VAs) are at the top of my
list of worst investments. You are absolutely right to
be skeptical about the surrender charge (the fee you
pay if you dare to want to cash out in the first seven
years or so that you own the VA), but that’s just the
tip of the scary iceberg.
Financial advisers love VAs because these investments earn a fat commission and they are easy to
sell. Consumers fall for the sales pitch of getting tax-deferred savings by investing in mutual funds
through a VA as well as the promise that they won’t
ever get less out of the VA than they put in.
Here’s what the adviser doesn’t tell you: You will
pay an extra fee each year that hovers around 1. 3
percent to give you that asset protection, which
kicks in only if you die. If you take all your money
YOU MAY HAVE LOST all your money—and I
know how wrenching that is—but let’s get something
clear: You have not lost everything. You have your husband, a nice Social Security payout and $20,000.
If you can buy a place for $150,000, a 10 percent
down payment ($15,000) would leave you $5,000
for an emergency cash fund, which I think is important. A 30-year fixed-rate mortgage for $135,000 will
run you about $835 a month, which is about half
your Social Security payment. Buy only if you can
afford the 30-year fixed—don’t take on a risky
adjustable-rate mortgage on your fixed income.
Of course, you will also have the additional
costs of property tax and insurance to contend with,
as well as private mortgage insurance the lender will
insist on if you make less than a 20 percent down
payment. If, after you add up those costs, you don’t
have enough money left to cover your other living
expenses, you must either lower your purchase price
or just keep renting. C