Cuapa Asset Management

Even if retirement is a far way off for you, it is important to start planning now and thinking about what you want to put away in your retirement fund. One of the questions that often come up from people planning for their retirement is whether to invest in annuities or mutual funds for retirement.

Annuities Explained

Annuities are a financial instrument offered by many insurance companies. They are basically a guaranteed investment indexed to certain investments made by the company from which the annuity is purchased. In short the annuity company will either pay you guaranteed annuity rates or base your investment on other types of securities like stocks, bonds, mutual funds, mortgages, or a variety of all of these and possibly other investments as well. Annuities offer a regular, often guaranteed-minimum income to the holder after a certain date, indexed to the aforementioned investments’ performance.

Mutual Funds Explained

Mutual funds, on the other hand, consist of units of a fund which is invested in stocks, bonds, and cash by a qualified manager. They are usually provided by banks or independent fund managers, and the institution providing the mutual fund may charge an annual fee to the holder, take a commission out of the mutual fund itself for managing it, or charge a trading fee, or a combination of any of these.

What’s the difference?

Both annuities and mutual funds are similar in that their payouts are indexed to underlying investments. The difference between the two investments is the coverage period.

An annuity is a sort of reverse life insurance policy. You pay into it while you are alive, and once you retire, it guarantees an income (based on specified annuity rates) for fixed periods of time until you die. The issuer of the fixed income annuities are betting that you won’t live a very long time so that they can keep more of what you paid into the annuity fund, so if an insurance salesman after looking at you is anxious to sell you an annuity over other products, perhaps it’s time to consult a dietician.

A mutual fund, on the other hand, is physical property which you own in the form of a security. It continues to exist, regardless of whether you are living or dead. On the other hand, there is no guaranteed minimum payout like you may get with an annuity.

So which is better?

Both annuities and mutual funds have their respective benefits and each person may find one more appealing than the other.

One of the major things to consider is investment expertise. Do you know what you are getting into when purchasing a mutual fund? Do you know how to evaluate the stocks it holds to see whether you’re buying a stable fund? If not, an annuity might be for you.

On the other hand, do you have a family to look out for which you wish to be provided for once you are gone? If so, a mutual fund may be preferable because it survives even after the holder dies, and is a part of the holder’s estate.