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.
As a result, the broad-market index has an excellent historical track record of generating wealth. 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.
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.
According to the 4% rule, if you retire with $500,000 in assets, you should be able to withdraw $20,000 per year for 30 years or more. Moreover, investing this money in an annuity could provide a guaranteed annual income of $24,688 for those retiring at 55.
Much like an IRA or 401(k) plan, annuities offer tax-deferred growth, meaning you don't have to pay any tax on income or gains until you withdraw them. This can be of particular interest to the wealthy.
Annuities can be a bad choice for some people—they have higher fees and less flexibility than some savings options. And depending on the type you choose, your heirs may get nothing after you die even if far less was paid out than you had contributed. but for others they are a great option to help save for retirement.
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.
The key advantage of purchasing an annuity at 70 is the guarantee of a steady income stream. An annuity is an insurance policy designed to provide a consistent flow of payments, unaffected by market fluctuations. This guarantees financial certainty for many retirees.
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.
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.
The one time it's okay to choose a single investment
That's because your investment gives you access to the broad stock market. Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market.
You (or your beneficiaries) will generally get your money back because the insurance company is not basing the payments on your life expectancy. Instead, they know they need to pay it all back over a certain number of years, and they'll earn a profit while holding your funds.
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