Annuities Vs Mutual Funds: Difference, Use And Benefits

Are you planning on retiring soon? Looking for the best investment plan for your retirement? Well, this blog is for you. Retirement can be a tough thought when you don’t have a viable plan. According to a survey conducted by the Stanford Centre of Longevity, 55% of pre-retirees don’t have viable finances or a plan for their retirement or they are barely making ends meet. Two of the most prominent retirement plans are Annuity and Mutual funds, but which one is best?  In this annuities vs mutual funds, we will compare both investment plans and see the difference. 

What Is Annuity?

So, the first thing in this annuities vs mutual funds comparison is, what is Annuity. It is a contract between an insurance company and a person where the insurance company pledges to provide a steady stream of income to the beneficiary during the time of their retirement. You can opt for an annuity plan by making a single lump-sum payment or by making periodic payments to the insurance company. When a person retires, the annuity company makes regular income payments to the person over time. 

You can decide when you want the payment instalments and for how long. You can opt for like a 10-year payment plan or a lifetime payment plan, where an annuity company will pay you for the said period, whether 10 years or a lifetime after retirement. 

Majorly, there are 3 types of annuities: Fixed, Index and Variable, and your payment plans and time depend on the type of annuity plan you choose. 

A Fixed annuity is when you pay your annuity company a fixed amount, either as a single payment or periodic payments. Then, the company returns by providing you with income payments for a set time period. This is one of the main differences in this annuities vs mutual funds comparison. 

An index annuity is when you give all your money to an annuity firm, and the firm invests it in an index. In this annuity plan, the amount of each payment the firm makes will depend on the performance of the index you’ve put your money on. You will receive a minimum amount from the firm but you can also get much more depending on the performance of the index. 

In a variable annuity, there is no say as to how much money you will get in return. In this type of annuity, your contributions are invested in a fund and the amount of money you receive depends directly on the fund’s performance. There is a chance of significant growth in variable annuity, but you can also lose the money you invest. 

Advantages And Disadvantages Of Annuity Investment

Now, the next thing to discuss in this annuities vs mutual funds comparison is the advantages and disadvantages of an annuity investment plan. 

Advantages Of Annuity

Guaranteed Income: One of the major benefits of an Annuity plan is the fact that you precisely know the minimum amount of payments made to you and the time span of those payments. 

Tax-Deferred Growth: Annuity offers Tax-deferred growth, which means that you won’t have to pay any tax until you don’t start receiving the payment from the annuity firm. 

No Contribution Limit: In most other retirement plans, there is a limit on the money you can invest in a single year. However, an annuity plan does not have any contribution limits. 

Disadvantages Of Annuity

Early Withdrawal Penalties: If you ever wish to withdraw from your annuity account before your retirement, you may have to pay early withdrawal penalties, depending on the annuities. 

Payments Depend On The Firm: You have to be very careful while choosing the perfect annuity firm for you, as the payment solely depends on the firm you’ve selected. If the annuity company fails, it will also drown your investments. 

High Fees: Annuity has higher process fees as compared to other retirement plans. This can affect you significantly in case of a longer payment plan. 

So, now we know what an annuity is. Now, the next thing in this annuities vs mutual funds comparison is to know about mutual funds and their advantages and disadvantages. 

Also Read: Intraday Trading vs Long-Term Investing: Choosing Your Investing Approach

What Is Mutual Funds?

Mutual Funds is an investment plan where a financial expert takes money from you and other investors and pools it to invest in funds comprising different equity stocks, bonds or other securities. 

When you buy a stake in a mutual fund, your return depends on the performance of the shares, bonds or securities in the fund as a whole. 

The main thing about mutual funds is that they are a diversified piece of investment. Mutual fund investors invest in a wide range of companies, reducing the risk. Mutual funds have shares from companies working in different sectors. This ensures that the fund stays safe from any fluctuation in the market affecting a single sector.

It also makes investors’ tasks easy as an investor can invest in a multitude of good shares and bonds at once. This means an investor doesn’t have to search for the best shares to invest. 

Advantages And Disadvantages Of Mutual Funds

This annuities vs mutual funds comparison is incomplete without listing the advantages and disadvantages of mutual funds. So, let’s quickly take a look at them. 

Advantages of Mutual Funds

Low Processing Fees: In general, mutual funds have a lower fee when compared to annuities. According to the Investment Company Institute, the average mutual fund expense ratio is around 0.47%. 

More Potential Growth: We’ve established that mutual funds have lower fees, which means a higher profit margin. Moreover, due to the fact that mutual funds are basically shares, they can offer huge returns. 

More Liquid Than Annuity: One of the main differences in the annuities vs mutual funds comparison is the liquidity. As we mentioned in the annuity section, selling an annuity before maturity requires you to pay extra fees. This is not the case with mutual funds, as they don’t charge additional fees when selling your stake. However, if you’ve invested in a retirement plan, you will have to pay the penalties if you withdraw your money before turning 59 and a half years old. 

Disadvantages of Mutual Funds

No Guaranteed Income: Mutual funds are based on stocks and shares, so there is a chance that your money can go to waste if the market comes down, there is no guarantee of income when investing in a mutual fund. If the market performs well, you can earn money. However, you can also lose all your money if it goes down. 

Returns Depends On The Market: The payment you will receive solely depends on the market. If the market goes down, so will your investment, which is one of the biggest disadvantages of mutual funds. Dependence on the market is one of the major disadvantages that we see in this annuities vs mutual funds comparison. 

Growth Is Not Tax-Deferred: You must pay taxes if you invest in mutual funds. However, many investors offer a tax-deferred investment plan, so choose wisely. 

Our Verdict: Which One Should You Choose

In this annuities vs mutual funds comparison, we talked about what both of these things are and what are their advantages and disadvantages. Although both of these investment plans are good and offer good returns, we recommend putting your retirement money in an annuity plan. This annuities vs mutual funds showed us that annuities are far safer than mutual funds, and as a retired person, this is what you want: the safety of your assets. 

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