Which Is Better: Mutual Fund vs. Annuity

Hi there, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Today's topic is a good one: which is better, a mutual fund or an annuity? You might be thinking, "Wait a minute, Stan, that's an easy one," but it's not. I'll explain the details after this.

Disclaimer

Before we dive into mutual funds and all that, I want to give a quick disclaimer. We don't advise people on mutual funds. We only do Fixed Annuities here at The Annuity Man. So, don't call me asking, "Should I put my money in an S&P or international fund?" That's not what we do. If you're looking for that advice, I can point you to someone who’s really good at it, like Rick Ferri, who was on my Fun with Annuities podcast. He's a disciple of John Bogle, the founder of Vanguard and the godfather of mutual fund investing.

Understanding Mutual Funds

Mutual funds, in essence, are a basket of stocks, typically diversified. There are thousands and thousands of mutual funds out there. We could go down that rabbit hole all day long, but they’re growth products in most cases. Sure, there are bond and treasury funds, but mutual funds are basically baskets of investments, typically managed by someone. The offshoot of that are ETFs, which are a more efficient version of that. But I'm not sure there is a good comparison when you compare mutual funds to annuities. Mutual funds are investments, whereas annuities are contracts, and contracts give you exactly what’s going to happen in the policy.

The Difference Between Investments and Contracts

I know a lot of annuity types are sold based on hypotheticals, theoretical returns, and back-tested numbers, which I think is a total mistake. You should buy an annuity for what it will do, not what it might do. You buy a mutual fund for what it might do. So, when deciding which one to buy—mutual fund or annuity—my question is, what do you want the money to contractually do?

If you say growth, buy the mutual fund. But if you need principal protection, income for life, legacy, or long-term care, an annuity is a better choice. These are the four things I believe you should look for in an annuity: principal protection, income for life, legacy, and long-term care (which I call my PILL acronym). If you don’t need to contractually solve for these, then you don’t need an annuity.

Choosing Between Mutual Funds and Annuities

If you need market growth, buy the mutual funds and follow Rick Ferri. He’s got a great program out there. Check out the podcast that we did together. Rick’s an ex-fighter pilot, a master investor, and a smart guy.

But here’s the thing: I love when people say, "All annuities have high fees." That’s just not true. People who say that are incredibly misinformed. It's ridiculous. Think about it: Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, Multi-Year Guarantee Annuities, and Fixed Indexed Annuities have no annual fees. Did you hear me? No annual fees.

Now, if you attach riders to an Index Annuity, that’s when the fees start, but you don’t have to attach a rider. So, Bogle’s mutual fund approach focuses on stripping out fees for low-fee investing, and I’m right there with him—stripping out fees and providing no-fee contractual guarantees with annuities. These are not investments; they are contracts with guaranteed outcomes.

Annuities vs. Mutual Funds

The two have a fee correlation, but the real difference is that mutual funds are investments, while annuities are contracts. Annuities transfer risk to the annuity company to solve for principal protection, income for life, legacy, and long-term care. You’re not transferring that risk to a mutual fund. So, you should never buy an annuity for market growth. Will annuities with potential ever outperform mutual funds? In my opinion, no. I just don’t see it happening. And you should never buy annuities based on hopeful return scenarios.

That approach plays well in the “Bad Chicken Dinner Seminars” and those pop-up ads you see online claiming returns like 17% or 14% with principal protection. If you buy that, you get what you deserve. You're looking for something that sounds too good to be true. With annuities, if it sounds too good to be true, it is. In mutual funds, the potential exists for hypothetical returns, but they are still investments, not contracts.

Conclusion

Just remember: Annuities are not investments; they are contracts. If you don’t believe me, buy one. You’ll get a policy in the mail, which some people call a contract, because that’s exactly what it is. And because it’s a contract, you buy it for the contractual guarantee.