Choosing between an annuity and an investment depends on timing. An annuity by its very nature is aimed at people looking toward retirement. An investment could be any one of a myriad of different ways to get your money to work for you. It can be to generate income upon retirement or to save for college. It could even be to make money now because you got a hunch.
Annuities are savings vehicles usually offered by insurance agencies, but also by other financial institutions. Basically, they are meant to store money for retirement. Funds are placed into an investment scheme with the promise that after age 59 ½ the investor will receive guaranteed payments. Those payments can last over a period of time, usually of the savers choosing. There are fees for taking money out early, known as a surrender charges.
The term investment is conceptual by nature. It encompasses all kinds of financial vehicles available to the saver, from trading stocks to investing in mutual funds to trading foreign currencies to dabbling in durable goods markets. It could mean hiring a money manager to choose the right investments to make, or it could mean doing the research and going it alone.
Annuities Are Investments
Annuity and investment are not opposites. In fact, you can’t have an annuity without some form of investment vehicle to make it work. Annuities normally fall into two categories. They can be fixed, in which funds are invested conservatively, such as in government securities or high-grade corporate bonds. Fixed annuity holders know in advance just how much the payments will be when they receive them. The other type is a variable annuity. Funds in this kind of financial vehicle are invested in what are called sub-accounts, which offer the annuity holder several investment options. They could be mutual funds with an emphasis on emerging markets, or investments in funds targeting large established companies. A big drawback to annuities is switching strategies. It is possible to switch from riskier to more conservative annuity options, but a fee may be involved, especially if many changes take place. It is also pricey to switch from one company to another that is advertising an annuity with better rates.
Choosing the best approach to growing your wealth can be difficult. With an annuity, it can be quite clear what you get, when you’ll get it, and how much you’ll get. These are questions people close to retirement would want answered, but annuities usually require a significant amount of money. Choosing investments can give a saver room to make more money -- or lose it. It’s a riskier home for your hard-earned cash, but the rewards can be much greater.
No matter which route you choose, fees will lurk around every corner. It’s imperative to know what you are getting into and to make choices that do not eat into the savings nest you are trying to put together. For instance, an annuity from an insurance agent can come with a fee of as much as 10 percent of the investment, and there can be handling fees thereafter, particularly with a variable annuity. Other financial vehicles falling under the category of investments can also carry hefty fees. For instance, if you are considering mutual funds, take into account the management expense ratio. This fee is the cost of managing the mutual fund, and can run as a high as 5.5 percent of an investment.
Based in Mattapoisett, Mass., Jason Perez-Dormitzer has been an award-winning journalist and editor since 1995. His work has appeared in "American Banker," "Taunton Daily Gazette," "The Standard-Times," "Brown (University) Medicine" and the "Providence Business Journal," among others. He holds a B.A. in journalism from Rutgers University.