What's the difference between an annuity and a regular mutual fund as far as retirement?

Question

A friend of mine said that my investment "adviser" will make a KILLING on an annuity if I open one up; plus, I have to be in this annuity for something like 8-10 years before (decreased fees or something??) occurs. I'll be transferring around $260k from another brokerage house to my "adviser."

This same friend thinks I need to stick with mutual funds... when you compare the two investment vehicles, their difference in total return over the last 12-15 years isn't that much difference (but that there were tax benefits or something with one or the other).

Any help?

Answer 1

There is no simple answer . . . that's why you are having problems deciding. Remember, the guy selling an annuity will be collecting a whopping fee . . . perhaps as much as 12.5% of your assets. The fee will be hidden in all sorts of ways and NOT fully disclosed NO MATTER WHAT he tells you.

STICK with your mutual funds. Your friend is RIGHT!

How do I know? . . . I bought an annuity from NY Life, a reputable company, and only found out about the fees by pouring over the delivered document . . . but not in time to get my money back. I've still got the annuity, but have NEVER put another nickel into it.

Worse, the salesman was a friend, and he really didn't know how to calculate the fees. He agrees that they are much steeper than he thought . . . he only got about 1/4 of the fees himself, but even that was near impossible to compute.

Answer 2

The right choice depends on your financial goals. If you don't need the income right away an annuity may actually be appropriate. Why? Because of the fact that taxes are deferred in an annuity. If you are looking for a "guarantee" an annuity may also be appropriate. Why? Some annuities have income riders that guarantee a minimum return on your investment - NO MUTUAL FUNDS GUARANTEE PERFORMANCE!!! This is why an annuity is an "insurance" product. Annuities are not bad products. They definitely serve a purpose. There are so many different types of annuities that they are becoming increasingly more flexible.

However, if you are looking to use your funds in the near future mutual funds might be the way to go. Don't let fees be your only deciding factor... front end load mutual funds will also charge an "off the top" fee! That can be 6% or more on the high end and you will probably have annual fees as well.

Weigh the entire situation. And don't forget to prioritize your investment goals - this is the most important step in figuring out what investment is best. Good luck!

Answer 3

The straight, direct answer:

Annuity: Insurance company product but when you withdraw you can get an income for LIFE. You keep getting it as long as you live. You CANNOT outlive your money. The insurance company guarantees the payments to you BUT they are probably fleecing you 25 cents on the dollar for taking that risk off your hands.

Mutual Fund: Investment vehicle designed to accumulate capital. This is a simpler investment product with no risk transfer. Simple = cheap. However, you will be responsible for drawing down your assets in retirement. Once the money's gone, it's gone.

Many people in the savings phase of their carreers will give you the advice you see here: stay away from annuities. I agree with them to a point. When you are in the savings phase and retirement is years away, why dump huge commissions in the lap of a insurance salesman? Ultimately though you will need to have some of your assets in a form that you can't outlive so you'll eventually turn to an annuity provider.

Some additional advice: a market is developing slowly for cheaper annuity products. These are designed to the needs of a person who has a big 401(k) balance and is about to retire. Many plan sponsors who trashed old pension plans are looking to help their employees get into life annuities easier and cheaper and NOT take out (and fritter away) big lump sums. These firms are establishing "preferred annuity provider relationships" with insurers. Since these transactions represent the cheapest form of annuity purchase and don't involve a salesman, they represent a much more affordable way to convert assets into a life income. Look for this in the next few years at your employer.

Answer 4

I think each of them have their purpose.

The good thing about an annuity is that there is no risk of default like a bond and pays a person till s/he 'leaves'. You just need to work out how long you need to be alive to make it worth while to buy one. The insurance company would obviously like a certain outcome better than the other.

With mutual funds, you are exposed to all the risks associated to the financial markets, and there are so many funds out there these days, and choosing the right one can be quite challenging at times. But nothing too difficult if you're willing to do your homework.

Funds do put more control in your hands and there are people who have done very well with them. But I believe the choice is very much determined by how much time and money a person has got left. (i.e. for a retiree who has lost almost all his money in the dot-com crash or the Enron scam, then an annuity would probably be the best choice)

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Answer 5

just say the two are actually equal in returns ( i kind of doubt it) the annuity you have very little options on what happens after the money goes in, in mutual funds you can do whatever you want, take it all out, leave it, take a monthly check, anything, so why would you pay extra for an annuity if you think the returns are even?
if you absolutely need the garaunteed income then maybe the annuity is ok for you, hard to say, but that money in some tbills will get you over 1,000 a month in income anyway

Answer 6

Annuities: Very expensive & you are taxed at your earnings rate when you cash in.

Mutual Funds: No-Loads that are also low fee have no "hidden costs" and you'd be taxed at the "capital gains rate" after holding over one year.

Ask what $10,000 would be in similar funds if held from 1986 - 2006. The rate of return may not seem that different, but the accumulated compounding will effect you greatly.

Besides: In Mutual Fund investing there are two basic rules;
Have an "asset allocation"
Buy no-load, low fee funds.

Annuities are the one of the highest commision $$$ that can be earned by an advisor. Guess where that money comes from!

(Check past issues of Forbes & Fortune)

ALSO: Gurantees of return mean much less money for you!

Answer 7

Your friend is correct. Loads of commissions on an annuity, it's an insurance product. Loads of fees in a mutual fund.

Read about them. Check Guardian.

Answer 8

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