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Annuities vs Mutual Funds: Which Is Better?


Interest rates are abysmal at the moment. Even if you are lucky enough to have a significant pot of money sitting in a bank account, it is unlikely to earn you much in the way of interest. The US Federal Reserve has set the rate of interest at 1.5%. Back in 2006, it was 5.25%. Most banks offer savings rates below the Fed base rate, so it isn’t unusual to see headline rates of 0.5% or less. In short, the only way to make your money work harder is to look at alternative investment vehicles. This is even more important if you are hoping to boost your retirement fund.

Firstly, let’s take a look at annuity vs mutual fund in greater detail. Then, we will assess which one is best for you.

What are Annuities?

Annuities are a savings vehicle used for retirement planning. They are actually mutual funds but are packaged as a tax-deferred savings option. You can invest money in an annuity to save tax and earn compound interest. This money can be withdrawn when you retire or used to generate an income. Annuities can be variable or fixed, depending on your appetite for risk and how far away you are from retirement.

The financial landscape has changed in recent years and annuities are less popular than they used to be. However, they do have their place. Annuities are a useful tax-saving investment vehicle, but this is only the case if you leave the money in the fund until you reach 59.5 years. Money withdrawn from an annuity before then is subject to a 10% penalty. But, if you want a guaranteed income for life, fixed income annuities are very safe. Some annuities also pay out a sum to relatives when the investor dies.

What are Mutual Funds?

Mutual funds are an investment portfolio overseen by a fund manager. Money from lots of investors is pooled together and invested in a series of different assets. These could be anything from stocks and shares, to forex, bonds, gold, and even bitcoin. There are mutual funds to match your risk profile, so if you want to play it safe, look for a mutual fund that is managed conservatively, and vice versa.   They are a popular investment tool and many people have a stake in a mutual fund as part of their 401(k) retirement plan.

Financial advisors often push annuities because they earn a far bigger commission for doing so. Broker fees are lower on mutual funds, they are easily accessible to amateur investors, and depending on which funds you pick, you could enjoy a very good return on your investment. However, returns are not guaranteed and there is little protection from a volatile market.

Annuities Vs. Mutual Funds.

The decision of whether to invest in annuities or mutual funds is not straightforward, so it is always best to consult a financial advisor before you move money around. A poor decision now could jeopardize your retirement income in years to come, so this is not something to rush into feet first!