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
| Annuity | Mutual Fund | |
|---|---|---|
| Principal Protection | Yes | No |
| Access To Principal | Limited liquidity | Liquid |
| Control Over Money | Yes | Yes |
| Reinvest Earnings | No | Yes |
| Tax-Deferred Growth | Yes | No |
| Guaranteed Growth | Yes | No |
| Can Lose Money | Depends on type | Yes |
| Guaranteed Income | Yes | No |
| Inflation Protection | Yes | No |
| Affordability | Can be expensive | Low Cost |
| Professional Management | Depends on type | Yes |
| Death Benefit | Yes | Yes |
| Long-Term Care Insurance | Yes | No |