Deciding where to invest $10,000 for retirement requires understanding the options available. Two popular choices are the S&P 500 and annuities. Each has unique attributes, benefits and risks, which are crucial to consider when planning for retirement.
The S&P 500 index tracks the performance of 500 large companies listed on U.S. exchanges. It’s a live indicator of the strength of U.S. equities. Recent forecasts suggest varied expectations:
For 2023, the S&P 500 is projected to end at around 4,496, a 17% increase from the end of 2022.
Looking toward 2024, estimates from strategists put the average target at 4,836, indicating a 6.3% advance.
Goldman Sachs predicts the index might rise to 4,700 by the end of 2024, with a total return of about 6%, including dividends.
FactSet’s consensus suggests an 11% increase in bottom-up EPS for the S&P 500 in 2024.
These projections imply modest growth, but investors should be mindful of market volatility and the impact of economic factors on stock prices.
Annuities: Advantages And Risks
Annuities offer guard against market and longevity risks. They have several pros:
Customization options and the provision of a “personal pension”
Annuities also have notable cons:
Complex with high upfront costs
High fees and limited access to funds
Not all annuities protect against market downturns, and inflation may affect income payments
Comparing Earning Potential On $10,000
S&P 500
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
Annuities Investment
Multiyear guarantee annuity (MYGA): With an average return rate of 3.5%, a $10,000 investment could grow to about $14,106.
Fixed indexed annuity: With an average return rate of 5%, a $10,000 investment could grow to about $16,289.
Variable annuity: With an average return rate of 6.5%, a $10,000 investment could grow to about $18,771.
Single-premium immediate annuity (SPIA): With an average return rate of 1.5%, a $10,000 investment could grow to about $11,605.
These figures are based on average return rates and historical data. Actual returns can vary based on market conditions, annuity contract terms and other factors. While the S&P 500 offers potential for higher returns, it also comes with greater market risk. Annuities, on the other hand, offer more stability and guaranteed income but generally yield lower returns and may have restrictions on fund access.
Making The Right Choice
The decision between the S&P 500 and an annuity depends on individual financial goals, risk tolerance and retirement timeline. While the S&P 500 offers the potential for higher returns and liquidity, it comes with market risks and requires active management. Annuities provide guaranteed income and protection against market volatility but are less flexible and come with higher fees.
For those seeking long-term growth and are comfortable with market fluctuations, the S&P 500 might be more appealing. Conversely, people prioritizing stable, guaranteed income and wanting to avoid market risks might find annuities more suitable.
It’s a good idea seek personalized guidance from a financial adviser who can consider your financial situation and retirement goals. This professional advice can help you navigate the complexities of investment choices and ensure a well-informed decision for a secure and comfortable retirement.
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While the S&P 500 offers potential for higher returns, it also comes with greater market risk. Annuities, on the other hand, offer more stability and guaranteed income but generally yield lower returns and may have restrictions on fund access.
A straight fixed annuity is the easiest type of annuity to calculate a payment from. This is because fixed annuities work like bonds. If you use $50,000 to buy a fixed annuity paying 5% per year, for example, you'll earn $2,500 annually or about $208.33 per month.
If you are currently planning for retirement and are looking for the right financial instrument to achieve the best growth and income results, you are better off using a dividend stock investing approach rather than use annuities.
A $100,000 immediate income annuity purchased at age 65 could provide around $614 per month. With a 5% interest rate and a 10-year payout period, the same annuity might pay approximately $1,055 monthly. At age 70, a similar annuity could offer a lifetime payout of around $613 per month.
Over its history, the S&P 500 has generated an average annual return of 9%, including re-invested dividends. At that rate, even a middle-class income is enough to become a millionaire over time. $500 a month, for example, is less than 10% of the median U.S. household's monthly income.
With a $300,000 fixed immediate annuity, a 65-year-old man could receive around $1,450 to $1,950 per month for life, while a 65-year-old woman may get $1,800 to $2,200 per month. These payments are guaranteed for as long as the annuitant lives.
For a $150,000 annuity with an annual rate of 5%, monthly payments could be around $994.50. If the payout is structured for the annuitant's lifetime, the monthly payment could be approximately $2,549 and slightly less at $2,537 for a 10-year certain payout option.
Wealthy investors can leverage certain aspects of annuities, which is one of the reasons they are popular. For example, those with a high level of disposable income can contribute to an annuity if they have maxed out their traditional retirement plans.
Layers of fees can obscure an annuity's total cost and reduce how much it pays out. Before buying an annuity, it's important to understand what you'll have to pay for all the features you want. While you'll always pay a mortality and expense fee, some fees only apply to certain types of annuities.
In general, 401(k) plans — and the very similar 403(b) plans offered by nonprofit organizations — are a better way to grow your cash for retirement than an annuity.
Most financial advisors will tell you that the best age for starting an income annuity is between 70 and 75, which allows for the maximum payout. However, only you can decide when it's time for a guaranteed stream of income.
If you buy an annuity from an insurance company that fails, you do have some recourse. Each state has a guaranty association that protects policyholders when an insurance company fails. There are limits to this coverage, however. The amount you can recover varies by state but is typically about $100,000 per policy.
A $25,000 single premium immediate annuity “would most likely generate less than $150 per month for a 65-year-old female,” the Cerulli researchers said. And that assumed a single-life-only **guarantee.
If it's a qualified annuity, the money you invested was pre-tax, and 100% of your withdrawals will be taxable. However, if your annuity is nonqualified, you invested using after-tax dollars and pay taxes on the earnings portion of withdrawals.
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