The Federal Reserve cut the Fed Funds rate by 0.25% this week, with more reductions likely ahead. As inflation cools and employment weakens, bond yields are already dropping. This is a problem for retirees: many bonds are callable, meaning issuers redeem them early and reissue at lower rates. Investors who held 5.5% and 5% bonds are seeing them called and replaced with yields closer to 4%.
For retirees relying on bond income—or taking RMDs—this environment means lower expected returns from balanced portfolios. And with U.S. stocks expensive and possibly due for a correction, conservative investors should not depend on equities for stable income.
Enter the MYGA
A MYGA (Multi-Year Guaranteed Annuity) is a fixed-rate annuity that behaves like a CD but often pays more. MYGAs currently offer rates in the mid-5% range and unlike many bonds or CDs, they are non-callable. That means your rate is locked for the full term (3–10 years), even if market yields fall.
Benefits of MYGAs:
- Guaranteed fixed rate of return, non-callable.
- Principal protection—very safe.
- Tax-deferred growth until withdrawal.
- Option for tax-free rollover at maturity (1035 exchange).
- Creditor protection in many states.
- Nearly 2% higher than comparable 5-year Treasury (5.6% versus 3.7%).
The Fine Print:
- Limited liquidity; surrender charges for early withdrawals.
- Some MYGAs allow interest to be withdrawn, others none.
- Withdrawals before age 59½ may face a 10% IRS penalty on earnings.
- Best suited for investors with sufficient liquidity elsewhere.
Why MYGAs Belong in Portfolios Now
With rates expected to trend lower, locking in today’s 5%+ yields through a MYGA can secure income for years. A callable bond at 5.5% may vanish if rates fall, but a 5.5% MYGA will not. This makes MYGAs particularly attractive for retirees and conservative investors looking for income stability.
Strategies for Using MYGAs:
- Fixed Income Replacement: Substitute part of your bond allocation with a MYGA to boost yield and avoid call risk.
- Laddering: Buy multiple MYGAs with staggered maturities to improve liquidity and reinvestment flexibility.
- RMD Support: Use MYGA interest or partial withdrawals to help cover RMDs without tapping into equities in down markets.
Is a MYGA Right for You?
If you’re over 59 1/2, have significant fixed-income holdings, and don’t need immediate access to these funds, a MYGA may be an excellent fit. For many retirees, locking in 5%+ guaranteed and tax-deferred is far more attractive than taking chances on callable bonds or expensive equities.
