Annuity vs. 401(k): Which Is Best for My Retirement?

If you’re getting close to retirement, are you sure that you’ll have enough money to live the kind of life you want? The good news is that there are many options to help you reach your retirement goals — but picking the right one can be challenging.

When considering investment vehicles, you may have thought about the differences between an annuity vs. a 401(k). Both options have similarities but some important differences that could impact your retirement.

This guide will teach you everything you need to know about the pros, cons, and differences of annuities and 401(k)s.

Annuities and 401(k)s are financial products designed to provide you with income in retirement. Traditional 401(k)s and annuities are both tax-deferred products, so you won’t pay taxes on the money you put into them until you make a withdrawal. Roth 401(k)s are different because you fund them with taxed income.

Now that we’ve seen the similarities between annuities and 401(k)s, let’s look at what makes them different.

What Is a 401(k)?
401(k)s are retirement plans usually offered through your employer. With a 401(k), you contribute a set percentage of your pre-tax income to a fund that is specifically designed to grow at a steady rate over time.

What Is an Annuity?
An annuity is a financial product offered by an insurance company. You can fund an annuity all at once with a lump sum or you can add to it over time to grow its value before you start taking money out of it. While some employers provide options for annuities in retirement plans, they’re usually purchased directly from an insurance company.

According to Lou Cannataro, a founder and partner at Cannataro Family Capital Partners “a good-performing annuity is another great tool to have in your financial toolbox if done properly.”

Annuities are not one-size-fits-all. Below, you’ll be able to learn more about some of the most common types of annuities, along with their benefits and some common reasons to choose them.

Your specific circumstances will determine which investment options are best for you.

Speak with a qualified financial advisor before making decisions about investments and retirement. They can provide you with information and options that you might not otherwise be able to find.

It’s important to know that you can invest in both an annuity and a 401(k). For many people, a combination of these products might be the best way to ensure the standard of living you want. With an annuity that is designed to provide you with specific benefits like paying for long-term care, you can ensure that your 401(k) is available to pay other costs or to pass it on to your beneficiaries.

Having both an annuity and a 401(k) also gives you more control over your tax liability each year.

You may be able to use some of the money from your 401(k) to invest in an annuity. This is an option if you don’t have extra money to invest. If you are nearing retirement age and you aren’t certain that you have enough time to accumulate and annuitize an annuity, your 401(k) could be the answer.

It’s vital that you talk to a financial advisor before removing money from your retirement funds. They can explain any pros and cons, as well as let you know what kind of penalties you may face if you withdraw money early.

A financial advisor can help you find ways to fund an annuity while providing you with other guidance about how to prepare for retirement.

There are many options available to help you fund your retirement, but that doesn’t mean it will always be easy. Both 401(k)s and annuities offer you a way to save and grow money, but they each have pros and cons to consider before you make changes to your investments. Check out our retirement timeline below to learn more about saving for retirement.

If you think that an annuity might be the right choice for you, contact us today for a free quote.