Mutual Funds vs. Indexed Annuities
Today we want to compare two financial products that are popular among retirees and those planning for retirement: mutual funds and indexed annuities. We’ll highlight their strengths and weaknesses when it comes to market gains, market downturns, fees, and liquidity.
Market gains
Mutual funds are a professionally-managed selection of stocks and assets in a particular market segment (e.g. healthcare, technology) or following a specific strategy (e.g. high growth, long-term growth). Based on the sector or strategy a mutual fund is targeted toward, you may see the gains follow the market closely. Those gains may potentially even exceed the S&P 500.
Indexed annuities also track market gains, typically at 75–85% of the upside. While lower gains than the S&P may not seem so appealing on the surface, you’ll want to read on to see why they have a major advantage over mutual funds.
Market downturns
Mutual funds drop when the market drops. Some categories that typically see outsized returns (technology, healthcare) may also see very high downside. Unless you time the market well by selling high, you’ll go down with the rest. While you can make money with mutual funds, it’s a risky path to take.
With an indexed annuity, there is no downside to the account value. When the market dips, the account value will not decrease by a penny. You keep all your gains. The only thing that happens is your account value stops gaining until the market swings upward again.
Thinking about retirement, it’s risky to allocate a significant portion of your wealth to volatile mutual funds. With indexed annuities, you’re taking 75–85% of the upside and none of the downside. Over any correction in the past two decades, you would have been far better off with an indexed annuity than investing in the S&P 500.
Fees and liquidity
Typically, mutual funds advertise fees between 1% and 1.25%. But if you read the prospectus, there are additional fees of about 2%, making the total between 3% and 3.25% per year. These fees are charged before you make a cent in income, and they can really cut into your gains.
Mutual funds have liquidity. You can sell your shares at the end of each trading day and lock in the funds after three business days. The problem is, again, that the fund is subject to to market downturns, and you may be selling your shares for less than you bought them.
With indexed annuities, you don’t have daily liquidity. Your liquidity is about 10% of the value of the account annually. On the upside, there are no fees or very low fees, less than 1%. And you never have to worry about losing money or having your portfolio drop in value.
Which will you choose?
With mutual funds, you take 100% of the market gains, minus high fees. When the market goes south, you are subject to the losses, and you’re still charged high fees.
With indexed annuities, you take 75–85% of the market gains with low or no fees. When the market goes south, you keep your gains and don’t lose anything.
Your choice will depend largely on your circumstances and risk tolerance in retirement.
Want to learn more about indexed annuities and mutual funds? We would love to help you plan your retirement. In our first few meetings, we get to know you, your retirement goals, and your current situation. Then, we craft a unique retirement plan, which may include indexed annuities as a portion of your asset allocation. We offer this service risk-free because we believe in this truly better retirement strategy.
Give us a call today at (866) 481–5211 or learn more at srsstrategies.com.
