When choosing the type of investments to make for retirement savings, you should consider several factors. Two popular types of retirement investments are the annuity and the mutual fund. While these investments have some common characteristics, they are for two different types of investors.
The annuity is a type of investment contract you can purchase through an insurance company. With an annuity, you provide the insurance company with regular payments throughout your working life, or you can buy it with a lump sum payment. Once you buy the annuity, the insurance company agrees to provide you a regular payment during your retirement years. While there are several different types of annuities, the main goal of the investor is to secure a regular payment upon retirement with limited risk.
The mutual fund is a type of collective investment scheme in which investors pool their money and allow a mutual fund manager to buy securities on behalf of the group. The mutual fund can invest in various securities, such as stocks or bonds, and all of the profits are shared among the shareholders of the fund. Mutual funds are provided by investment companies and are regulated by the Securities Exchange Commission (SEC).
One of the differences between these two types of investments is the tax status. Annuities are set up to be a retirement savings vehicle because of the tax treatment that you get from gains. When you invest in an annuity, the earnings in your account are allowed to grow on a tax-deferred basis. With a mutual fund, you do not get any special tax treatment, and you have to pay taxes on the earnings. The only way to avoid this is to buy the mutual funds through a retirement account such as an individual retirement account (IRA) or a 401k plan.
If you are concerned with returns over the long term, the mutual fund may be preferable. Annuities come with large expense ratios when compared to mutual funds. Mutual funds also tend to invest in securities that typically provide better returns. When you combine these two aspects, mutual funds generally provide you with a higher return by the time you reach retirement age. If you buy your mutual funds through a retirement account, the performance difference could make a big difference in your quality of life during retirement.