Mutual funds offer the average investor an affordable and easy way to get a diversified and managed investment portfolio. Mutual funds invest in stocks, bonds, and money market funds to give opportunities for balanced growth. This can be desirable for investors who are looking to capture some kind of market opportunity, either during their working years or during retirement.
A variable annuity is a contract between an investor and an insurance company whereby the insurance company agrees to pay the investor periodic payments that begin either immediately or at some point in the future. Not all annuities invest in mutual funds, but a variable annuity does. This is ultimately what makes them so different from other annuities and from other investments as well, because variable annuities seek to do two different things: they grow your money and they structure it for income.
If you are concerned about capturing market opportunities during retirement, here is a comparison between mutual funds and variable annuities to help you better decide which is best for your situation.
THREE WAYS THEY ARE THE SAME
- Mutual funds and variable annuities both charge fees.
- The fees charged by mutual funds can be ongoing charges, charges that only occur at certain times, or charges based on actions you take, such as when you move in or out of the fund. It’s easy to find out what fees you are paying for your mutual funds: look for the fund’s Total Annual Fund Operating Expenses.
- The fees charged by a variable annuity are also just like the fees charged by mutual funds, only in addition to those fees, you will also be charged separate fees by the insurance company. These fees are disclosed by the insurance company and include the following: surrender charges, M&E fees, sales charges, administrative fees and front-load fees. The fees charged by the mutual fund subaccounts are not published by the insurance company. To find out what those fees are, you have to read through the company prospectus. Be sure to consider the impact of both the fees from the mutual funds and the fees from the insurance company.
- Mutual funds and variable annuities are both invested in the stock market.
- Mutual funds offer you a virtually unlimited selection of funds to choose from. If you are invested in mutual funds through your company 401(k), then you may be limited to fund choice by your plan provider.
- Variable annuities offer subaccounts made up of various mutual fund families. You choose from a list provided by the insurance company make up of anywhere from seven to over a hundred different subaccounts, and if you select the growth enhancements available by the purchase of the income rider, then your investment selection are usually more limited.
- Mutual funds and variable annuities can both lose money in the stock market.
- Mutual funds are market investments, and as such, when the market performs well, they earn money; when the market performs poorly, they lose money.
- Variable annuities are backed by the claim’s paying strength of the underlying insurance company, but as an annuity invested in the stock market, they can lose money just like mutual funds. The guarantees offered by the purchase of the rider do not guarantee the performance of the funds.
THREE WAYS THEY ARE DIFFERENT
- Variable annuities allow you to receive ic income payments. Mutual funds do not. This is why variable annuities charge more fees than mutual funds. If you are in the accumulation phase of your life and looking for growth only, then a variable annuity may not be the best investment for your needs, especially if you haven’t yet contributed the maximum amounts to your IRA or 401(k) accounts.
- Variable annuities charge steep surrender penalties for early withdrawal. Mutual funds do not. Variable annuities are, generally speaking, designed to be a long-term investment, so if you need to access your money, then a variable annuity might not be a good choice.
- Variable annuities are taxed differently than mutual funds. Variable annuities grow tax-deferred, but when you take the money out, it is taxed at ordinary income rates. Mutual funds do not grow tax deferred, but their earnings are taxed at the lower capital gains rates. This is important to be aware if you are considering rolling over your 401(k) or IRA into a variable annuity, because both these types of investment accounts already grow tax-deferred, which means you will get no additional tax advantage.