Why Mutual Funds Are More Beneficial for Investors than Annuities

First, let’s get some terminology straight.  Investors are savers. Savers can be investors. Why the distinction?   Because investments pay a higher rate of return than a bank or credit union savings fund, but both necessitate actually saving money and putting money aside for whatever purpose you choose. 

The Passing of the Economic Recovery Tax Act of 1981 was when the concept of IRAs really took off and grew as an employee benefit from many companies.  Different companies offer various levels of matching contributions to their employee contributions.  The contributions made by employees to IRAs and other retirement accounts grow on a tax-deferred basis.

 In other words, your annual contributions are not taxed until you actually withdraw monies down the road.  This helps reduce tax liabilities during the years when one expects to earn more income. 

As you know, there are caps on yearly contributions to IRAs and ROTH IRAs and most people want to invest more for that “someday” when they can retire. Even if that day seems too far away to imagine. 

Two well-known investment options are Mutual Funds and Annuities.  So what is the difference?  Greater than most people realize and those differences translate into considerable financial savings. 

Why Mutual Funds Are More Beneficial for Investors than Annuities

What are Mutual Funds

A mutual fund is an investment vehicle comprised of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, etc. Mutual funds enable small individual investors’ access to professionally managed portfolios of equities, bonds. and so forth. Shareholder participates proportionally in the gains or losses of the fund.  

Because the average mutual fund contains hundreds of different securities, this means mutual fund shareholders gain important diversification at a very low price and at a relatively low-risk index. Dimensional Fund Advisors (DFA) offers high-quality, moderately priced mutual funds with all analysis based on academic reasoning … not on fly-by-night trends and fads. 

A huge added bonus for the investor is that most financial planners do not charge a commission on the purchase of DFA funds. 

That brings us to Annuities.  An annuity is a financial product that pays out a fixed stream of payments to an individual and is primarily used as an income stream for retirees. 

Annuities are sold by investment and insurance companies; both charge a relatively high commission and an annual handling/processing fee. Deposits into annuity contracts are typically locked for a period of time (surrender period) where the annuitant incurs a penalty if all or part of the money is touched. 

Annuities require a sizeable amount of cash outlay upfront with pay-out a number of years down the road.  If you’ve just won the Mega-Millions Lottery, an annuity would be a smart move.  If you haven’t; stick with Mutual Funds. 

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If you are still unsure as to whether or not you need an umbrella policy, our team at Hamilton Financial Planning can help! Schedule a complimentary get-acquainted meeting online or reach out to us at 512-261-0808 or scott@hamiltonfinancialplanning.com.

About Scott

Scott Hamilton is the founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees in Dallas, Houston, and Austin, Texas. With over 20 years of experience in the financial industry, and has completed over 250 financial plans for retirees across all industries, but mostly the oil and gas industry, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals.

He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.