When planning for retirement, the different types of investment options can be overwhelming. Two popular types of investments are mutual funds and annuities. Both have their pros and cons and both can help you be in better shape financially when you retire. Here’s a quick rundown of the differences between the two so you can better choose which is best for you.
What is a mutual fund?
A mutual fund is a portfolio of holdings such as stocks and bonds. After first opening a retirement account with your employers such as a 401(k) or an IRA, you can then purchase a mutual fund. The individual holdings form your mutual fund portfolio. While there are a lot of different funds out there, the categories can vary by the desired outcome. Common categories for long-term growth and retirement income include small and large-cap stock, international stocks, and bonds.
What is an annuity?
An annuity comes in two different forms. The first is a fixed annuity which can have a fixed interest rate like a bond, where the interest is paid to you over a specific period of time. The second type is a variable annuity. These typically have mutual funds as a sub-account. Most annuities are variable. Annuities differ in that they are actually insurance policies and not investment securities. Because of this, they are unregulated by the Securities and Exchange Commission or the SEC. An advantage to this, however, is that annuities come guaranteed by insurance companies. Annuities can be used as income streams for a set amount of time such as retirement. You can set your payment terms for a set amount of time such as 10-20 years while you’re in retirement, throughout the remaining course of your life or the life spans of any beneficiaries. This makes annuities a popular choice for retirement income.
How to choose?
To choose between the two, it’s important to think about what your goals are. If you want a guaranteed income backed by an insurance company, go with an annuity so you aren’t affected by fluctuations in the market. If you’re OK with market fluctuations and potentially larger returns on investments, mutual funds may be right for you. They will also be less expensive since you aren’t paying for insurance fees.