Finance, Money

Annuity vs. Mutual Fund: Which Makes More Sense For Retirees?

by Benjamin Roussey|Posted on | 3 minute read | Advertiser notice
investment options

Two of the most prevalent investment options for retirees are mutual funds and annuities. Like all financial and investment products, investing in either of these options comes with a set of benefits and drawbacks.

Let us discuss in detail and try to find out which one of these two investment options makes sense for you if you are about to retire.

What is an Annuity?

In an annuity, you can invest an amount of money, as a lump-sum payment or in parts, as a part of a contract between you and your insurance company. In return, you can choose to receive guaranteed proceeds either for a fixed tenure or for as long as you live. Whether the payments start immediately or after a fixed period, depends on the terms and conditions of the annuity you invest in.

Based on the likely rate of return, annuities broadly fall into two types of categories, namely, fixed annuities and variable annuities.

Fixed Annuity

A fixed annuity, true to its name, provides an assured return for the tenure of the contract. The insurance company guarantees reimbursement in advance, regardless of the market performance.

Variable Annuity

The variable annuity payouts are neither fixed nor assured. They may increase or decrease based on the market performance.

A key advantage of annuities is that investors defer taxes on interest, dividend, or capital gains for the duration of time their money is in the annuity. The taxation, at withdrawal, is only on the capital gains and not on the amount contributed towards the annuity. Also, as their name suggests, the annuities can be annuitized. You can make a guaranteed income stream for a fixed period.

Annuities are basically insurance products and not investment securities and hence the insurance companies provide the guarantees to back them. However, you should keep in mind that the Securities and Exchange Commission (SEC) regulates only the variable annuities and not the fixed ones.

Annuities are a useful means to defer taxes on investments and generate assured regular income in retirement which is even more vital in a rising cost and energy environment because of new policies.

What Is a Mutual Fund?

In a mutual fund, investment companies collect money from investors and invest it on their behalf. The money goes into a mix of investment securities and money market instruments to maximize returns.

You can set up and use a 401(k) account, a brokerage account, or an individual retirement account (IRA) to invest in mutual funds. Investment specialists and money managers run mutual fund portfolios and are responsible to generate the maximum possible returns for their investors consistently.

There are several types of mutual funds, each based on its investment strategy and the nature of securities that it invests in:

  • Equity Funds invest entirely in stocks
  • Index Funds imitate the investment mix of a market index, and their performance is directly linked to that of the index
  • Exchange-Traded Funds trade on stock exchanges
  • Money Market Funds invest in debt instruments
  • Fixed Income Funds invest in bonds
  • Balanced Funds invest in both stocks and bonds
  • Sector Funds invest in a particular sector
  • Global Funds invest in overseas markets

Annuity or Mutual Fund: Factors to Consider Before Investing

Here is a comparison that may help you choose between the two types of investments:

Safety

If you do not foresee having a steady income post-retirement, a fixed annuity may be the best option for you. In a fixed annuity, the insurance company guarantees to pay you a particular amount until the end of your contract period. Variable annuities do not guarantee a specific amount, but some may have a minimum rate of return guaranteed by the insurance provider.

With mutual funds, there is no guaranteed income. The rate of returns on the money you invest varies a great deal depending on the market performance.

Expenses

Annuities have some of the highest associated expenses among the investment products.

Mutual funds, especially index funds, are very low on expenses.

Tax-Deferral

Tax on any income from annuities is deferred until the time of withdrawal. On withdrawal, only the capital gains are taxable.

In mutual funds, you are liable to pay taxes on dividends and capital gains. However, if you invest through an individual retirement account (IRA) or a 401(k) account, you are liable to pay tax only at the time of withdrawal.

Return on Investments

Mutual funds may offer variable returns based on market performance, while annuities offer assured returns. On the other hand, there are many charges and fees associated with the annuities, which, when deducted from your gains, tend to make the returns on investment much lower. 

Liquidity

With mutual funds there is no lock-in period, making it easier for you to sell and exit anytime you wish. 

With annuities, however, there can be a lock-in period, as long as 10 years sometimes. Any early withdrawal can attract high surrender charges which hurts even more in a slow growth or no growth economy.

The Bottom Line

If you are looking for absolute safety, annuities are the best option for you. But if you do not mind some added risk with the potential to earn higher returns, you should invest in mutual funds. 

Finance, Lifestyle

Best Practices to Take Control of Your Personal Finances

by Benjamin Roussey|Posted on | 3 minute read | Advertiser notice
Personal Finances

You could win the Powerball jackpot and still end up broke simply because you did not manage your money well. You could also be earning a huge salary and find that most of the money’s gone before the month is out, leaving you strapped until the next paycheck (Allen Iverson almost knows about this – as do many others). That’s why it is good to be proactive and take control of your finances instead of asking yourself where the money went.

Here are 10 prudent tips to help you manage your personal finances effectively.

Set up separate bank accounts

You must set up a savings account and a checking account as soon as you land a job. Keeping your salary in these 2 accounts will ensure that you only spend the money from your checking account leaving the savings account intact for future goals.

Save first, spend later

Make sure that you have set up automatic withdrawal and deposit on the same day that you get paid. The deposit might go towards a retirement fund or an emergency fund. Do not miss out on the retirement plans offered by your employer (even the US military has TSP). What is important is to not wait until the end of the month to make that saving. Your spending budget should not take your entire income into account. Automatically moving a percentage of your income first will make sure that you can only access the spending money you have allocated in your budget.

Set up short and long-term financial goals

It is always best to set specific goals, for instance, do you want to buy a property when you reach a certain age? Do you have a clear idea of how much it will cost, even if it cannot be an exact figure as land and property prices can fluctuate? Then, count backwards to calculate the amount you will need to have on hand when that time comes and start saving. It will help to write your goals and the saving plan and place it where you can see it regularly.

Budget

Make a budget and stick to it. This is an important step to take if you wish to be in charge of your finances. When you list down your monthly expenses, you will find that it helps to know the bills that are to be paid routinely and the amount that is left over for saving, investing, or extra spending. This is vital when taxes and costs for goods are increasing because of new policies.

Monitor your spending

Once you know your monthly income and your budgeted amount for monthly bills, you will have a clear picture of how much money you can spend. This requires careful monitoring because it is way too easy to spend money thinking that you can just because you have paid all your bills. This will also help you see if there is an expense you can do without.

Live within your means

It is frugal living that fattens your bank balance. When you understand that you are not deprived of anything by living within your means, you will also realize that it is pretty easy to maintain a lifestyle that takes care of your needs without going overboard.

Set aside money for emergencies

Set aside some of your income each month towards emergencies. If there are no emergencies, you can be happy with the fact that you have saved a lump sum. If there is an emergency, you won’t have to panic and wonder where you will get the money from.

Educate yourself

You would do well to keep abreast of the latest tax laws to make sure that you maximize your savings. Keeping yourself well informed of the stock market and following the financial news will allow you to find safe investment opportunities.

Go for the discounts

There is no shame in looking for discounts and taking advantage of the offers made by retailers. If possible, take a more direct approach and master negotiation skills by working with small businesses. It can be a win-win for the business and you. Buying in bulk could get you a discount just as much as a long term relationship with a vendor. The idea is to avoid wasteful spending.

Take care of your health and property

Health – The body can throw in a lot of surprises along the way. It is best to be self-aware and maintain a healthy lifestyle. Make sure that you schedule regular doctor appointments, including dental care. Eating right and exercising will also keep you away from avoidable health risks.

Property – Regular upkeep and careful handling of the things you own, big and small, can shave a lot of repair costs from your monthly expenses. This is a great habit to cultivate and will also teach you to value what you own.

Regardless of how much money there is to manage, these tips can help you stay on top of your spending and saving, and leave you financially secure.

Finance, Money

Should You Invest Your Money or Save it?

by Benjamin Roussey|Posted on | 3 minute read | Advertiser notice
Invest Your Money

It can be difficult to pick between investing your surplus income and saving it. This is true for people that have just started working on their finances and those that have been investing for years. Ultimately, you need to decide the best course of action that will help you attain your financial goals. This can be through saving tools, investing options, or a combination of both.

Saving vs. Investing

Saving is generally regarded the safer route since your deposits do not decrease unless you make a withdrawal. This cannot be said for investments that depend on market fluctuations. Your stock option may go up today only to decline tomorrow.

However, savings will not allow your money to grow as you would like. In some cases, the interest offered barely matches the inflation rate.

This means that money parked in savings options tend to lose purchasing power over a longer period of time. Investing is a great option when you want to beat inflation and receive higher returns. However, you should know that investments are subject to market risks and you may not always get the return you hoped for. Sometimes, investments end up being worthless after a market crash.

Pros and Cons of Savings

There are several advantages of parking your money in a savings tool, such as savings accounts, savings bonds, certificates of deposits, or money market accounts. The biggest advantage is that there is no immediate risk to your dollar amount in the savings option.

Your money won’t reduce as long as you don’t make a withdrawal. You can reach your goals in time with minimal risk. You can also plan your finances better since you know exactly the kind of money you need to save each month to hit the goal.

However, that doesn’t mean that savings is not without its drawbacks. For instance, your money may not increase in value at par with the inflation rate. Basically, the amount of money you have parked in your savings option may lose value each year even if the dollar amount is not reduced.

Another downside to this is a decrease in purchasing power which may be possible in 2021 if there are more tax cuts but this is another topic. You need to set aside a higher percentage of your income each month than what you would need to if you got higher returns by investing.

Pros and Cons of Investing

Investing is an excellent option if you want to save money and see it grow. However, you need to be ready to bear the risks of market fluctuations. The potential of interest in investing is far greater than savings. Whether you invest in traditional stock options or use smart options, like investing apps and robo-advisors, you could stand to receive higher returns.

Another benefit of investing is that returns generally compound. This means that your investment earnings are put to work earning more money for you. You may enjoy better purchasing power since you won’t have to set aside nearly as much as you would need to do in the case of savings.

However, investing is not always the right option. You could find yourself in a financial bind if the investment rates bottom out right before you need the money. You may need to put off your plans for a better market day in such a scenario.

Follow Your Goals

It can be difficult deciding whether to invest or save. You should start by determining your goals before you decide. Goals are usually short term or long term and require being planned for differently.

1. Save for short term goals

You should not hesitate to open a savings account or purchase a CD if you want money by a certain date. There is zero risk of your money amount decreasing in this option.

2. Investing works in the long term

Investments tend to grow better and offer higher returns. You should consider investing if you don’t need the money by a specific date and are flexible in your approach. You should choose this option only if can afford to delay your monetary need by a few years in case the market takes a downward turn.

3. Comprehensive approach

You can follow a customized plan that combines investing with saving. You can divide any surplus cash you have each month in savings for short term goals and investments for the rest.

Finance

Factors You Should Consider Before Taking Out a Personal Loan

by Benjamin Roussey|Posted on | 3 minute read | Advertiser notice
Personal Loan

Taking out a personal loan can save the day for many. With debt levels rising significantly and emergency savings not always being available, more and more people are turning to personal loans when they are in a pickle.

Maybe you are considering getting a loan to consolidate your credit card debt, pay for emergency medical bills, or even start a small business.

And since almost every lender in the country is now offering personal loans, you can compare the offers and choose the best deal. A 0.25% difference in interest rate might not seem a big deal but it can help you save hundreds of dollars.

So, in this post, we have put together a list of key factors you need to keep in mind when choosing a personal loan.

Are You Okay With Paying High Interest Rates?

If you’re considering taking out a personal loan, interest rate is one of the most important things to think about.

Interest rate means the percentage of interest charged by the bank (lender) on the principal amount. You can either choose a variable interest rate loan or a fixed interest rate loan, depending on your preference.

If you take out a fixed interest loan, the bank will charge the same amount of interest throughout the course of your loan regardless of the market situation. In other words, your monthly installments will remain the same come the Wuhan virus or high water.

If your credit utilization ratio, debt-to-income ratio, and credit score are all good you can easily qualify for a lower rate of interest with most banks.

On the other hand, if you take out a variable interest loan, your bank can decrease or increase the rate of interest according to market changes. This means your monthly installments can also go up or down from time to time.

That being said, interest rates on personal loans are generally higher than, say, a mortgage loan. This is because a personal loan is unsecured and you have no physical asset to back it up. You don’t have to put any collateral up which increases bank’s risk.

Do You Have A Good Credit Score (And Credit History)?

Since a personal loan doesn’t involve any collateral, your credit score must be in good standing. A bad credit score will mean that the lender can significantly increase your interest rate. They do this to cover your risk of default.

So, if you’re considering a personal loan, pay attention to your credit score and try to improve it.

Do You know the Exact Terms of the Loan Including APR and Hidden Fees?

Before you sign the papers, make sure you completely understand the terms of your personal loan. You must know the total cost you will pay for the loan as well as all the fees you could/will incur throughout the loan.

APR or the annual percentage rate is the total cost of a personal loan and it’s applied on an annual basis. It includes the loan origination fees, interest, application fees, and several other charges which thankfully are not as debilitating in a low tax environment which we are in now.

Here is a quick rundown of some of the typical charges that aren’t always openly discussed when you apply for a loan:

Loan processing or origination fee: This is when the bank charges you to process your application. Some loan providers will charge you to process your personal loan application. For example, some banks charge 1% of the loan’s value as the processing fee.

We recommend you avoid all loans that come with a processing or origination fees – or ask the bank to waive it if possible.

Late payment fee: If you make your payment even a day late, most lenders will charge you a late payment fee. But this can really hurt your credit score so be very careful with your monthly payments. In some cases, you can ask the lender to waive this fee as a one-time courtesy.

Prepayment penalty: If you pay your personal loan early, then your lender may charge a prepayment penalty. Lenders use this tactic to get the full amount of interest from those who have taken out the loan. So, make sure you choose a loan that has no such penalty.

Failed payment fee: If you don’t have the money in your account to cover a payment you’ve made, some banks will charge you for it.

The Bottom Line

The decision of taking out a loan is a big financial responsibility and shouldn’t be taken lightly. Knowing about the above factors will help you choose the right lender with the most flexible terms. And remember, you can negotiate with lenders for more favorable terms – and you should, especially if you have a respectable credit score.