Comparing Annuities vs. Mutual Funds

Shawn Plummer

CEO, The Annuity Expert

Annuities and mutual funds are two types of investment options for retirement that many people consider. They both offer advantages, but there are also disadvantages to each one. This guide will help you understand the differences between annuities vs. mutual funds so you can make a more informed decision about which type is right for your needs.

Annuities

Annuities are designed to provide tax-deferred growth similar to a 401(k) or IRA or guarantee an income during a person’s retirement years.

Annuities are well suited for individuals who have specific retirement and estate planning goals since they provide a wide range of options.

Annuity Benefits

  • Principal protection (most contracts)
  • Guaranteed income for life
  • A guaranteed rate of return
  • The ability to earn interest without risk
  • Inflation protection
  • Avoiding probate and leaving a death benefit to beneficiaries
  • Long-term care insurance to pay for nursing home, assisted living, and home healthcare expenses.
  • Taking advantage of Medicaid without going broke first.

Mutual Funds

According to Investor.gov, “a mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.”

Mutual funds do not grow tax-deferred in the same way as deferred annuities, which means they don’t offset taxes until you take money out of your account.

Employer-sponsored retirement plans like a 401(k) usually invest employees’ money in mutual funds.

According to FINRA, Mutual funds are a popular way to invest for retirement because they can offer diversification and professional management, and certain advantages over purchasing individual stocks and bonds. Finra also states investing in a mutual fund involves certain risks where you may lose money.

Mutual Fund Benefits

  • Upside potential
  • Diversification
  • Affordability
  • Liquidity
  • Professional management

Instead of receiving a series of payments, a lump sum payout, or sweeping the interest in an annuity, mutual funds allow distributions in cash, or investors can reinvest the earnings back into the fund, making you a larger shareholder.

Investors receive their earnings through dividends, capital gains, and sales of shares.

annuity vs. mutual fund At A Glance

AnnuityMutual Fund
Principal ProtectionYesNo
Access To PrincipalLimited liquidityLiquid
Control Over MoneyYesYes
Reinvest EarningsNoYes
Tax-Deferred GrowthYesNo
Guaranteed GrowthYesNo
Can Lose MoneyDepends on typeYes
Guaranteed IncomeYesNo
Inflation ProtectionYesNo
AffordabilityCan be expensiveLow Cost
Professional ManagementDepends on typeYes
Death BenefitYesYes
Long-Term Care InsuranceYesNo

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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