Do you want to secure your future without being kept up at night worrying about market volatility? If you answered ‘yes,’ then a Multi-Year Guaranteed Annuity (MYGA) might be the right retirement planning tool for you.
MYGAs offer safety, security, and guaranteed growth, making them especially appealing to those approaching retirement. Keep reading to learn how MYGAs work, their pros and cons, and what to consider before making a purchase.
What is an MYGA?
An MYGA is a type of fixed annuity that offers tax-deferred growth and allows you to create a stream of payments in the future. During the first few years, typically 3-10 years, MYGAs guarantee a specific interest rate.
Upon the completion of the accumulation period, you have several options. You can receive the accumulated premiums and interest as guaranteed income, renew the contract under potentially different interest rates, or transfer the funds to another type of annuity. This transfer can be accomplished through a 1035 exchange, which is a tax-free process.
NOTE: All guarantees are subject to the claims-paying ability of the insurer.
MYGAs vs. Other Products
- Traditional Fixed Annuities: While multi-year guaranteed annuities are a type of fixed deferred annuity, they are usually funded by a single premium instead of installments. MYGAs differ from traditional fixed annuities in that they offer a fixed interest rate for a specified “multi-year” period. Traditional fixed annuities typically declare an interest rate for a shorter specified period (like on year) with the option to adjust the rate at the end of that initial period and at the end of each period thereafter for as long as the contracted term of the annuity.
- Certificates of Deposit (CDs): While MYGAs and CDs both offer fixed interest rates, they are issued by different institutions, have different withdrawal rules, and can pay out in different ways. Also, while annuities grow tax-deferred, CDs require the owner to pay yearly capital gains taxes.
- 401(k)s and IRAs: Like retirement accounts, MYGAs are intended to build savings as part of your retirement strategy. However, these annuities provide principal protection, guaranteed interest rates, and guaranteed income—none of which are offered by 401(k)s or IRAs.
MYGA Benefits
Guaranteed Interest
The primary advantage of MYGAs is the guaranteed rate of return for a contracted period beyond one year. With this product, you will know the amount of money you will receive at the end of your term. This feature lets you accurately plan your retirement income, eliminating any guesswork associated with market-linked investments.
Free Look Period
Like other types of annuities, one of the notable features of MYGAs is the “free look” period. This provision allows annuity owners to reconsider their decision within a set timeframe, typically ten days or more. Minimum free-look periods vary by state and insurers sometimes provide longer periods than required by state law. This enables you to cancel the annuity contract and receive a full refund of your premium with no early withdrawal penalty.
Principal Protection
Fixed annuities and MYGAs protect your initial principal amount subject to a surrender charge or market value adjustment if you end the contract. Regardless of economic downturns or market fluctuations, all your contributions stay intact. This feature offers peace of mind, especially for retirees and pre-retirees who prioritize the safety of their capital.
Flexibility
MYGAs allow you to choose the term that best aligns with your financial goals, whether you want your money to grow for three years, ten years or more. Moreover, many contracts offer penalty-free withdrawal provisions where you may withdraw up to 10% of your account value annually without being charged an additional fee.
Tax-Deferred Growth
One of the primary advantages of MYGAs is the tax deferral on earned interest. This feature may significantly enhance wealth accumulation, as taxes are only incurred upon withdrawal. The taxation on withdrawals from MYGAs depends on whether the funds used are qualified (like those from IRAs) or nonqualified. Taxes apply to both principal and interest for qualified funds, while for nonqualified funds, only the earned interest is taxed.
MYGA Disadvantages
Limited Returns
MYGAs may provide lower potential returns than other financial vehicles like mutual funds, 401(k)s, or IRAs if markets go up. On the other hand, if markets go down, MYGA interest rates remain the same during your guarantee period, so you can continue to grow your savings for the entire guaranteed period without worrying about your principal.
Long-Term Care (LTC) Limitations
With most annuity products, there are very liberal options for liquidation in case of chronic illness or other medical emergencies. For example, a typical chronic or terminal illness waiver allows funds to be 100% liquid after one year if you meet pre-determined criteria like a length of stay of at least 60-90 days in a long-term care facility.
Many MYGAs limit liquidity for LTC events and will penalize you with significant surrender charges if you need to access your money for long-term care. If you do not have access to a long-term care rider or other alternative, you might want to think twice about buying this kind of annuity.
Inflation risk
Because MYGA interest rates are fixed, they may not keep up with increases in inflation, which could erode the value of your money. You may be able to purchase a cost-of-living rider at an additional cost to minimize the impact of this problem–if this option is offered by the insurance company.
Market Value Adjustments
As with other fixed annuities, an aspect to be mindful of with MYGAs is the market value adjustment (MVA). This is a feature that can influence the withdrawal value of the annuity positively or negatively, depending on the movement of interest rates relative to the guaranteed rate of the annuity if you withdraw funds beyond the penalty-free amount or surrender the annuity before the end of the surrender charge period. However, it’s important to note that MVAs do not affect the death benefit or the guaranteed account value of the annuity, which offers a layer of financial security.
Provider Trust
Unlike some CDs, insurance annuity products like MYGAs are not FDIC-insured. Payback of your initial premiums and accrued interest are entirely dependent on the financial strength and claims-paying ability of the insurer.
That said, insurance companies are required to keep sufficient funds available to pay out claims. It’s important to assess the financial dependability of any insurance provider before buying an annuity.
Managing MYGAs After the Guaranteed Rate Period
Upon the conclusion of the guaranteed rate period, you have several choices. You can roll over the funds into a new MYGA, convert the account into regular income payments through annuitization, allow the contract to automatically renew, or opt for a new contract with potentially different terms. These options provide flexibility in managing the annuity’s value after your guaranteed rate period concludes.
Who Should Consider MYGAs?
While everyone’s circumstances are different, MYGAs are particularly well-suited for individuals approaching or already in retirement. The demographic most benefited includes those looking for stable, risk-averse savings options. These annuities offer a fixed interest rate, providing a cushion against the volatility of the stock market and other more unpredictable investment avenues. Moreover, MYGAs are accessible to a broad age range, usually up to age 85 (or older), offering flexibility in retirement planning.
Incorporating MYGAs Into Your Retirement Strategy
MYGAs offer a unique blend of safety, flexibility, and tax advantages, making them an attractive option for certain people, particularly those nearing retirement. However, it’s important to remember that MYGAs, like any financial product, should be tailored to your unique needs and circumstances. To unlock their full potential, contact a trusted annuity agent today.
