Ask anybody who has strong musical tastes which band is better, the Beach Boys or The Beatles, and you’ll likely get an earful. Art is subjective – it speaks differently to every person. Investments, however, are not art. They are designed to do specific things during specific times. The purpose of your retirement portfolio is to save for the day when you’re no longer getting a paycheck. Once that day comes, are mutual funds still the best investment? Or should you get an annuity?
You’ve maybe heard about annuities – how they can turn that money you’ve been saving for a regular payment. However, not all annuities are created equal. The Variable Annuity is often compared to mutual funds for several reasons. Which one is better? We’ll scrutinize these two investments in terms of fund performance, income payment, fees, and tax benefits so that you can compare and choose for yourself.
FUND PERFORMANCE TEST
Both mutual funds and the variable annuity invest in market securities. As a market security, the value of your investment is not guaranteed, and your account value can fluctuate. One of the reasons mutual funds are so popular is because they give investors built-in diversification and professional management. While there are literally thousands of different kinds of stocks and bonds, most mutual fund and variable annuities offer investors a choice of funds from among four different categories. As defined by FINRA, those four fund categories are as follows:
- Stock funds that invest in stocks.
- Bond funds that invest in bonds.
- Balanced funds that invest in a combination of stocks and bonds.
- Money market funds that invest in short-term investments sometimes called “cash equivalents.”
It’s hard for the average investor to know what fund will outperform another, and so most of us rely on the advice of a financial professional. Your typical stock broker, however, will only be able to recommend the mutual funds sold by their company, bank, or financial institution. If you are investing in a 401(k) plan sponsored by an employer, you will also likely have a limited selection. When you select mutual funds for a variable annuity, that selection again will be narrowed down by the financial institution and the insurance company that underwrites the claims-paying ability of the annuity.
The Bottom Line: As with mutual funds, you can lose money with a variable annuity, and there is no guarantee that you will make money. In fact, you could even lose your principal investment. There are other kinds of annuities that can give you market-linked gains that are not sold by brokers. Indexed annuities are sold by independent agents who can select and compare the earnings potential from among the thousands of different options and hundreds of different carriers. Have your annuity tested here?
The biggest difference between a mutual fund and a variable annuity is that a variable annuity is structured to give you periodic payments. Those payments can be set up for the rest of your life or for the life of your spouse using something called an income rider. These riders go by many different names depending on the insurance company, and they usually charge a fee, but they strive to give the investor some kind of income guarantee.
In order to get an income from a mutual fund, you can choose income funds. Such funds are mutual funds, ETFs or any other type of fund whose goal is to generate an income by investing in securities that pay out dividends or interest. You can also remain invested in regular mutual funds and follow a withdrawal strategy such as the 4% rule whereby you withdraw no more than 4% of the value of the portfolio to use as income while allowing the remaining principal to grow.
The Bottom Line: Annuities can give you income guarantees but mutual funds cannot. Whenever you have a market investment, there is always the risk that the value of the investment will go down. During retirement, your account is also going down because you are taking money out for income. There are annuities other than the variable kind that protects the value of your principal so you do not lose money due to market risk. To learn more about these kinds of annuities, GO HERE.
FEES AND EXPENSES TEST
Mutual funds come with more than one kind of fee, and so do variable annuities. In fact, because a variable annuity is trying to guarantee you an income, it also charges you fees by the insurance company in addition to the fees charged by the mutual funds. What makes things tricky for the average investor is that the insurance company is required by law to tell you upfront about their fees, whereas the mutual fund fees are only disclosed in the prospectus somewhere in the fine print. Get your free Truth about Variable Annuities Report today.
Mutual funds generally charge two kinds of fees: sales charges and annual expense fees. This is also true for mutual funds offered inside a variable annuity. The front load fee or sales charge is the fee that typically goes to the broker who sells the shares and this fee – usually between .25 and 1%. This fee immediately reduces the value of your initial investment. A 12b-1 fee is an example of an annual operating expense and is also generally between .25 and 1 %.
The Bottom Line: If you are investing in a variable annuity in order to grow your money, then you are likely paying way more fees than you would if you simply invested in the mutual funds alone. If generating an income from your investments is your goal, the variable annuity is considered by many financial experts to be the most expensive kind of annuity on the market today. Don’t believe us? Read the report.
Both mutual funds and annuities offer tax benefits, but the benefits are different.
A mutual fund gives investors a break when the returns or gains on their money are taxed. Interest gains on market securities are not taxed at normal income tax rates, but rather they are taxed at a much lower rate known as a capital gains tax.
Annuities, on the other hand, allow investors to grow their benefits tax-deferred. This means that as long as you don’t take any money out of the account, you will not be taxed on any of the returns or gains earned by your money until you take that money out. When you do take it out, it will be taxed at normal income tax rates.
The Bottom Line: If you are saving for retirement in a tax-deferred vehicle such as an IRA or 401(k), then you are already getting tax-deferred growth, so rolling your money over into a variable annuity would NOT give you any additional tax benefits.
As more and more Americans head into their retirement pension-less, more and more confusion exists about investment vehicles and savings. Annuities are the only kind of investment vehicle that can guarantee you a pension-like payment for life. They are also one of the most complicated investments out there. To have your annuity tested or to compare your mutual fund portfolio with the benefits offered by an annuity, call us at (888) 440-2468 or fill out our simple form. We’re happy to run comparison tests free of charge to help you compare and make the best decision possible.