While no single financial product can meet the financial needs of every retiree, annuity products have evolved to earn a respectable place in many retirees’ portfolios.– Randy Hux
One of the easiest to understand products in the financial world is the multi-year guaranteed annuity or MYGA. A MYGA is a fixed-rate insurance product that allows purchasers to create a stream of payments in the future. Typically, a MYGA product’s payments begin from 3-10 years of the purchase date, usually with interest and past premium.
Most people purchase a MYGA with one lump sum. If you remove this money before the end of the contract, the insurance company will apply surrender charges. Many MYGAs will allow the annuity owners to take “required minimum distributions” (RMDs) with no penalty. Penalty-free RMDs become important when you reach age 72.(70½ if you turned 70½ before Jan 1, 2020). At that age, government regulations require you to withdraw RMDs from your retirement accounts each year. A MYGA contract may allow you to take RMD money out without triggering a penalty. However, this is not the case with every MYGA. You need to consult with an annuity expert to determine which products offer that option.
MYGAs can Protect Against Volatility.
Uncertainty about the economy after COVID-19, market volatility, and punishing interest rates have more conservative investors flocking to MYGAs. These savers are looking for some measure of predictable growth, but with less risk. MYGAs are often compared to bank certificates of deposit (CDs). They offer protection of savings and higher interest rates than CDs, along with tax-advantages. Compared to many other kinds of safe money products, MYGAs are easier to understand and use in your retirement plan. Even if you somewhat resistant to annuities, a MYGA might make a lot of sense in your particular situation, especially if you are within a few years of retirement or already in retirement.
MYGAs can provide tax benefits.
Before putting your cash into a CD, you may want to consider purchasing a MYGA instead. A MYGA has one significant advantage over CDs that could impact your savings in a big way. Namely, while a CD in an IRA or 401(k) can be tax-deferred, CDs that are not in retirement accounts are taxed annually on their interest. With a MYGA, however, your money continues to grow tax-deferred and is only taxed when you withdraw it. This tax-deferral feature could end up saving you thousands! Their similarity to bank CDs and their simplicity means that MYGAs could be a great option if you have CDs that are about to mature. Instead of renewing that CD at rates that could be as low as .6% to 3.15% today, you could move to a MYGA with significantly higher rates. Plus, you’ll get the “turbocharge” of deferred taxation.
MYGAs: Potential downsides to consider
For many people, MYGAs are a viable alternative to bonds, CDs, and other conservative retirement-planning products. However, there are some potential downsides you must discuss with your financial advisor.
Some areas of concern include:
Liquidation for Long-Term Care (LTC)
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 and 60-90 days of confinement to 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 in confinement. If you do not have an LTC policy or other alternative, you might want to think twice about this kind of MYGA. If you notice MYGAs with “too-good-to-be-true” rates, it is usually because that MYGA limits LTC liquidity.
If having an A-rated annuity company is essential to you, you should be aware that the MYGAs offering the best rates are typically provided by B and B+ carriers. That makes sense because A-rated companies don’t need to get more business by providing better rates.
Around 90% of the MYGAs offered today are from B or B++ carriers.
Is working with a B-rated carrier necessarily bad? Most of the time, it’s not at all. You should, however, find out more about that particular company to discover whether you are comfortable doing business with them. Your annuity expert will provide you with a variety of quotes to help you make a choice that feels right to you.
Free partial withdrawals aren’t free.
A portion of the pricing of an annuity contract has to do with “free partial withdrawals.” These features vary with some providing 10% access starting day one of the agreement, and others reducing that amount to 5%.
You can imagine that higher interest rate guarantees for MYGAs mean that the annuity company is more restrictive when it comes to withdrawals. In exchange for higher rates, some companies restrict you to ZERO partial withdrawals without surrender penalties. Others limit withdrawals to interest-only distributions. If a quoted MYGA rate seems attractively high, you should ask how the contract treats partial withdrawals.
Every financial product has upsides and downsides that must be taken into account prior to purchase. Be sure your advisor has expertise in annuity products and can explain all the pros and cons.
Summing it up:
MYGAs can be an excellent product for some conservative investors looking for better growth, tax advantages, and safety. However, even though they are easier to understand and implement than other types of safe money vehicles, there are potential pitfalls to discuss with an annuity expert before purchasing.