Don't Buy It: "Purchase whole life insurance for a better value."
Life insurance comes in two basic flavors: term insurance and whole life insurance. With the former, you're buying only insurance; the latter also includes
an investing component, which makes it more expensive. The premium cost of a whole life policy is going to be much higher than that of a term policy. This
would be justifiable if you were getting a great investment deal. But you really aren't—when you consider all the embedded fees.
A Better Idea: As far as I'm concerned, life insurance should be about life insurance, not investing. Reserve that for your 401(k) or IRA, and invest on your own through low-cost exchange-traded funds (ETFs) or no-load (commission-free) index mutual funds.
Don't Buy It: "Stocks are too risky; play it safe with bonds."
It's true that stocks are riskier than bonds and that, recently, bonds have produced better returns than stocks. But "recently" is the past; investing is
all about the future. When interest rates are as low as they are today, the future is likely to be less profitable for bond investors; the value of bonds
goes down when formerly low rates go up. And with the current interest rate on the ten-year treasury note at only 1.5 percent, there's virtually nowhere
else for them to go. (To be clear, 1.5 percent isn't normal. Before the financial crisis, the same ten-year security paid an interest rate of around 5
As for stocks, before you assume they're too much of a roller-coaster ride, don't forget about inflation—another word for the fact that over time, the price of stuff rises, on average about 3 percent a year. You need your long-term investments, like retirement money, to earn at least that average percentage so that when you retire you can afford the same standard of living you have today. Stocks have the best chance of earning inflation-beating returns.
A Better Idea: Keep some of your long-term investments (money you won't touch for at least ten years) in stocks. Consider dividend stocks, which both change in value and pay a portion of a company's earnings to the shareholder, typically on a quarterly or annual basis. Your 401(k) or 403(b) probably offers a stock fund that invests in dividend-paying companies, which include most of those in the S&P 500 Index. The dividend yield for that index market is currently about 2 percent—more than the yield of a ten-year treasury note! In general, be wary of investment tips, even from friends or family. Love doesn't mean having to take their financial opinions as gospel.
Don't Buy It: "Only multimillionaires need a trust. You're all set with a will."
Oh, no, you're not! A will designates where your assets go after your death. But what if you become sick and incapacitated and need someone to oversee your financial affairs? Your will won't help, and court proceedings will be required to establish a guardian to act in your stead. A trust functions for your own use and benefit while you are alive—including designating someone to handle your affairs in the event of incapacitation—and when you die, the courts aren't involved in the transfer of your estate.
A Better Idea: Pay a lawyer to draw up a revocable living trust. Also arrange for a durable power of attorney—a document that enables you to appoint someone to manage all your financial and legal affairs on your behalf should you become incapacitated. Finally, you'll need a "pour-over" will as backup, covering any assets (like furniture and items of strictly sentimental value) you haven't put into your trust. The little extra time and money that go into these steps are well worth it, for your sake and that of your loved ones.
Suze Orman's latest book is The Money Class: How to Stand in Your Truth and Create the Future You Deserve (Spiegel & Grau). To ask Suze a question, go to oprah.com/omagazine_talk.
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