Annuities vs Mutual Funds

The Pennsylvania State University Retirement Plan offers both mutual funds and annuity accounts. What are the basic differences between these two options, and which may be right for you?

To make the right choices for your portfolio, it’s helpful to understand these investments. When creating your retirement portfolio, you need to consider whether mutual funds, annuity accounts or a combination are right for your savings goals.

What is a mutual fund?

A mutual fund is a pool of investments owned by many investors. These investors buy shares in the fund, and the fund invests the money, based on its stated objective. Mutual funds include choices in major asset classes such as equities (stocks), fixed-income (bonds) and money market securities. Investors share in the gains or losses of the fund, and returns are not guaranteed.

What is an annuity?

An annuity is a contract between an individual and an insurance company. Investors in annuities shift the risk of running out of money to the insurance company. Annuities are often more expensive than mutual funds because of this feature. There are two different kinds of annuities in your plan: “guaranteed” and “variable.”

What is a guaranteed annuity?

A guaranteed annuity, such as TIAA Traditional, guarantees income during retirement. It is a way to save for retirement that preserves the value of your principal, pays a minimum guaranteed interest rate (with the opportunity for additional amounts) and lets you choose lifetime income payments when you retire. It is backed by the claims-paying ability of the issuing insurance company.

What is a variable annuity?

The value of a variable annuity fluctuates based on the market performance of its underlying securities, much like a mutual fund. Unlike fixed annuities, there is no guarantee of principal repayment or rate of return.

How do I receive retirement income from a mutual fund?

When taking income from mutual funds, you generally have two choices. You can take a lump-sum withdrawal (taking your fund balances in a single sum), or create a systematic withdrawal strategy designed to meet your income needs in retirement so that you receive regular payments.

Do mutual funds or annuities offer more income options in retirement?

Both mutual funds and annuity accounts offer you an array of choices for your retirement savings needs. But investing for retirement is only one part of preparing for your financial future — it’s just as important to determine how you will receive income in retirement. Annuities generally offer more options when it comes to obtaining this income.

How do I receive retirement income from an annuity?

Annuities generally provide you with more income options than those offered through mutual funds. You can take lump-sum or systematic withdrawals, or select from the following income options:

  • Single-life annuity: Offers regular benefit payments for the life of the annuity owner.
  • Joint-life annuity: Offers regular benefit payments for the life of the annuity owner and a partner.
  • Fixed-period annuity: Pays income for a specified number of years.
  • Interest-only payments: Offers regular payments in the amount of the interest that would ordinarily be credited to a retirement annuity.
  • Partial annuitization: A strategy through which you annuitize a portion of your account balance to generate income. The balance remains invested until a later date.

What if I need help?

Deciding which investment options may be right for you depends on your unique financial situation and your retirement income goals. For help in developing an investment strategy, call TIAA at 800 842-2252, Monday through Friday, 8 a.m. to 10 p.m. or Saturday, 9 a.m. to 6 p.m. (ET). A TIAA Financial Consultant will help you create a retirement portfolio that’s appropriate for you.

Mutual Fund & Annuity Comparison
  Mutual Fund Annuity
Basic Definition A pool of securities, such as stocks and
bonds, managed by an investment
company.
An insurance contract with one
or more fixed-rate or variable
investment options.
Income options
(all guarantees
are subject to the
claims-paying
ability of the
issuing company)
  1. Systematic withdrawals
  2. Lump-sum withdrawals
  1. Sytematic withdrawals
  2. Lump-sum withdrawals
  3. Lifetime income with guaranteed payments
  4. Lifetime income without guaranteed payments
  5. Fixed-period annuities
  6. Interest-only payments as an annuity account income option
Annual tax treatment during accumulation Any growth on your pretax
contributions accumulates tax deferred
until you receive money.
Any growth on your pretax
contributions accumulates tax deferred
until you receive money
Annual tax
treatment on
withdrawals
All withdrawals are subject to ordinary
income taxes. You also may be subject
to a 10% early withdrawal penalty
before age 59½.
All withdrawals are subject to ordinary
income taxes. You also may be subject
to a 10% early withdrawal penalty
before age 59½.