It’s easy to assume all fixed annuities are created the same. You select an annuity provider, you sign a contract, and eventually, you collect your bounty*. But the type of fixed annuity you choose could influence your savings potential, your timeline for retirement, and even how much you’ll pay in taxes when the time comes.
Settle your internal MYGA vs. fixed annuity debate by exploring both their shared benefits and notable differences.
What is a Fixed Annuity?
A fixed annuity is an insurance product purchased to help guarantee reliable income post-retirement. You pay an upfront premium—either in a lump sum or in installments—in return for future payouts of the principal and any interest earned as monthly income benefits.
Fixed annuities fall into one of two categories:
- Immediate annuities begin paying out quickly, anywhere from immediately to about one year from the annuity contract signing date.
- Deferred annuities sit undisturbed, generating tax-deferred interest until the buyer’s predetermined initial payout date. That date is typically at least a year into the future.
What is an MYGA?
Multi-year guaranteed annuities (MYGAs) are fixed annuities that guarantee buyers a specific rate of return for the duration of their contract. MYGA contracts are relatively short-term savings plans and typically last less than 10 years. Once the rate lock period has elapsed, the annuity owner is typically allowed to either take their money out or renew the contract for another period of time at a guaranteed interest rate that may be higher or lower than the previous one.
MYGAs are often compared to certificates of deposit (CD) in that they’re both fixed-term and fixed-rate contracts. But where MYGAs and CDs align on term lengths, they differ on growth potential. MYGAs generally guarantee interest rates that are higher than CDs. In addition, unlike CDs, the interest generated on the MYGA is tax-deferred.
Core Benefits of MYGAs and Fixed Annuities
First, let’s run through the financial benefits that come along with both MYGAs and other fixed annuities.
Tax Advantages
Fixed annuities, including MYGAs, are typically tax-deferred. This means the account value inside your annuity grows without immediate tax obligations. The government doesn’t take a dime of that burgeoning nest egg until you start taking monthly benefits, allowing interest to compound in the interim.
Reliable Income
Both options also provide guaranteed income. Though the term lengths of individual annuities may vary, they still offer peace of mind for the duration of your contract. Both have fixed interest rates, so your rate of return is not at the mercy of market fluctuations.
Untouchable Premiums
Unlike playing the stock market, which can put your savings at risk, fixed annuities (including MYGAs) ensure your principal is protected. Even when interest rates are shaky, the money you set aside for retirement or other needs is safe as long as:
- The insurance company you choose is financially sound.
- You avoid penalties for making early withdrawals or surrendering your annuity.
- You have riders in place in case of death or incapacitation.
MYGA vs. Fixed Annuity: Important Differences
Even if you know the basics of annuities, there are some nuances between products that are important to grasp before you opt into a contract.
While all MYGAs are fixed annuities, not all fixed annuities are MYGAs, and there are key differences between the two.
Principal Funding
Traditional fixed annuities may be funded in one lump-sum payment or through a series of payments. Multi-year guaranteed annuity contracts usually require the lump-sum option paid in full when purchasing the MYGA.
Length of Guarantee Period
When you purchase a fixed annuity or MYGA, you commit to keeping your money in the annuity for a set number of years. This period typically coincides with the accumulation phase of the annuity. In a fixed annuity, this period is called the surrender period. In an MYGA, it’s typically referred to as a guarantee period.
You can choose among several durations, ranging from three years to 12 years or more depending on what the insurance company offers.
This is where an MYGA offers a potential advantage over a traditional fixed annuity. In an MYGA, the interest rate paid to your account value is guaranteed for the full duration of the guarantee period. If you have a 7-year guarantee period, your fixed rate of annual interest is guaranteed for all seven years.
In a traditional fixed annuity, your fixed rate of interest may not last the full surrender period. You may buy an annuity with a 7-year term but the rate may be guaranteed only for the first three years. After that, it may increase or decrease depending on market interest rates and other factors. A traditional annuity provides a guaranteed minimum rate that it can never fall below.
Timeliness
MYGAs’ fixed-term setup makes them more suitable for consumers who are approaching retirement age or have already retired. You’d likely prefer a traditional fixed annuity over an MYGA if you’re earlier in the retirement planning process and won’t need to access payouts in the near future. The interest rate market at the time of your purchase may also impact your decision.
If you’re buying an annuity in a relatively high interest rate environment, you may want to opt for an MYGA, which will guarantee that higher rate longer than a traditional fixed annuity. If market rates drop, rates on your existing traditional fixed annuity may fall as well.
On the other hand, if you’re buying in a relatively low interest rate environment, you may be better off with a traditional fixed annuity. Instead of locking in a low rate with an MYGA for several years, you may benefit from a traditional fixed annuity if and when market rates increase.
MYGA vs. Other Annuity Types
MYGAs fall under the umbrella of fixed annuities, but there are other annuity types worth exploring, too.
- Fixed-index annuities are similar to traditional fixed annuities, except their interest rates are tied to a specific market index, like the S&P 500. You may get a higher interest rate, but only when the market is performing well. In contrast, MYGAs are steadier and more predictable.
- Variable annuities are riskier than fixed annuities, but they also have the potential for a bigger payoff. Their interest rates follow the market in a way that’s similar to mutual funds. If the market improves, your rate could jump up a rung or two. If the market tumbles, your annuity interest rate could plunge, and you could even lose your principal.
Choosing Between Traditional Fixed Annuities and MYGAs
Ultimately, the debate between MYGA vs. fixed annuity options comes down to how you answer a few questions:
- Under the current rate environment, is it better to lock in an interest rate for a longer period, or could rates increase in the next few years?
- Are you able to make a lump-sum premium payment, or are period payments better for your financial plan?
- Do you prefer taking a risk with your interest rate or locking down a fixed percentage for the entirety of your contract?
- Are you saving for a future that’s still way in the distance or prepping for a retirement plan that’s a few years away?
Choosing an annuity like an MYGA is just the first step toward retiring in financial comfort. If you’re looking for expert insight into your personal finances and retirement income strategy, ask to speak with a licensed annuity agent to see which annuity product best suits your needs.
*Disclaimer: All guarantees are subject to the claims-paying ability of the insurer.
