It is vital to consider ways to secure our finances when we retired. This is where annuities come in. They provide a steady and guaranteed stream of income for as long as we are alive. There is, however, a price to pay as the investor looses control of the money in exchange for the fixed income stream.
This is where a mutual fund comes in. They come in a bid to create managed payout funds, which provides a steady income stream to subscribers, even though not guaranteed.
This is similar to an annuity in that they are income funds made to give investors equally and established monthly payment. Even though it's a bit similar to an annuity, there are some differences. Whenever there is a low-interest rate, the funds offer yields ranging from 1% to 5%. Some factors determine the investors’ monthly payout: the duration before the target date and the performance of the funds.
Annuity payout does not rise along with inflation. This only happens in the presence of a COLA rider in the contract. With inflation, managed payout funds will rise, which will trigger a rise in interest rate. The yields will not be constant but will float with the markets. While there is no solid guarantee of income, there is also the probability of a loss of principal. Investors can, however, access their principal if they want, which is not possible with an annuity. Payout investors can access their money daily and can sell shares for cash whenever they want.
There are some reasons why managed payout funds are enticing for investors.
• Uncertainty about how financially stable annuity companies are
• Cogent issues like investment costs and liquidity restrictions
CIO of Equities at Charles Schwab Investment Management, Omar Aguilar, reported that
“Mutual fund companies are trying to understand what clients want in a monthly income product. Their goals of having high income and managing volatility can be at odds with each other,”
There is, however, the concern if managed payout funds will give better payouts compared to annuity contracts. According to Immediateannuity.com, a couple that invests $150,000 could be entitled to $640 a month provided any of them is alive. This is a better deal as long as the insurance carrier is solvent.
There is also the issue of taxes. With an annuity payout, there is a mix of return capital alongside interest. This is taxed as ordinary income. Such managed payout funds will provide a return in terms of interest, long and short-term capital gains, and dividends. The tax rate differs, depending on the nature of income you got.
While managed payout funds come with advantages over annuity contracts, many investors are not prioritizing them. This is because the income from these funds does not correspond to an annuity contract. Besides, it comes with a higher risk when you consider the absence of principal and income.
Advanced Accounting & Tax Planning