What is a MYGA Annuity

What is a MYGA Annuity?

Posted On March 7, 2024 By Scott Stratton, CFP(R), CFA In Portfolio Management, Retirement Planning /   No Comments

A MYGA is a Multi-Year Guarantee Annuity. It is also called a Fixed-Rate Annuity and behaves somewhat like a CD. There is a fixed rate of return for a set term, typically 3-10 years. At the end of the term, you can walk away with your money or reinvest it into another annuity or something else. Today’s MYGA rates are in the mid-5% range, the best they have been in a decade.

Annuities are one of the most confusing insurance products for consumers because there are so many varieties. In addition to MYGAs, there are Variable Annuities, Fixed Index Annuities, and Single Premium Immediate Annuities (SPIAs). Some of these are expensive, illiquid, and have quite a poor reputation. That’s because the Variable and Index annuities can pay a high commission, and have been sold by unscrupulous insurance agents to clients who didn’t understand what they were buying. States have been cracking down on bad agents, but even now, some of these products are highly complex and difficult to understand how they actually work. They are a tool for a very specific job and investors have to make sure that it is right for them. Unfortunately, with some agents, their only tool is a hammer, so every problem looks like a nail.

Why I like MYGAs

I do like MYGAs and think they are a good fit for some of my clients. Unlike the other annuities, MYGAs are simple and easy to understand. I have some of my own money in a MYGA and will probably add more over time. We consider a MYGA to be part of our fixed income allocation. For example, we may have a target portfolio of 60/40 – 60% stocks and 40% fixed income – and a MYGA can be part of the 40%.

Here are some of the benefits of a MYGA:

  • Fixed rate of return, set for the duration of the term. Non-callable (more about this below).
  • Your principal is guaranteed. MYGAs are very safe.
  • Tax-deferral. You pay no income taxes on your MYGA until it is withdrawn. This can be beneficial if you are in a high tax bracket now, and want to delay withdrawals until you are in a lower tax bracket in retirement.
  • You can continue the tax deferral at the end of the term with a 1035 exchange to another annuity or insurance product. This is a tax-free rollover.
  • Creditor protection. As an insurance product, a MYGA offers asset protection.

Lock in Today’s Rates

Interest Rates have risen a lot over the last two years as the Federal Reserve has increased rates to fight inflation. As a result, the rates on MYGAs are the best they have been in over a decade, over 5% today. The expectation on Wall Street is that the Fed will begin cutting interest rates sometime this year as inflation is better under control.

Now appears to be a good time to lock-in today’s high interest rates with a MYGA. This is one of their big advantages over most bonds. Today’s bonds often are callable. This means that the issuer can redeem the bonds ahead of schedule. So, when we buy an 5-year Agency or Corporate bond with a yield of 5.5%, there’s no guarantee that we will actually get to keep the bond for the full five years. In fact, if interest rates drop (as expected), there will be a wave of calls, as issuers will be able to refinance their debt to lower interest rates.

We are already seeing quite a few Agency bonds getting called in the past month.

We don’t have this problem with a MYGA, they are not callable. The rate is guaranteed for the full duration. Given the choice of a 5.5% callable bond or a 5.5% MYGA, I would prefer the annuity given the possibility of lower rates ahead. The MYGA will lock-in today’s rates whereas the callable bond might be just temporary. If rates fall to 4%, the 5.5% bond gets called and then our only option is to buy a 4% bond.

Some bonds are not callable, most notably US Treasuries. However, the rates on MYGAs are about 1% higher than Treasuries today. If you are planning to hold to maturity, I would prefer a MYGA over a lower-yielding, non-callable bond.

The Fine Print

What are the downsides to a MYGA? The main one is that they are not liquid and there are steep surrender charges if you want your money back before the term is complete. Some will allow you to withdraw your annual interest or 10% a year. Other MYGAs do not allow any withdrawals without a penalty. Generally, the higher the yield, the more restrictions.

One way we can address the lack of liquidity is to “ladder” annuities. Instead of putting all the money into one duration, we spread the money out over different years. For example, instead of having $50,000 in one annuity that matures in five years, we have $10,000 in five annuities that mature in 1, 2, 3, 4, and 5 years. This way we will have access to some money each and every year.

Like a 401(k) or IRA, withdrawals from an annuity prior to age 59 1/2 will carry a 10% penalty for pre-mature distributions from the IRS. The penalty only applies to the earnings portion. Think of a MYGA as another type of retirement account.

Lastly, I do get paid a commission on the sale of the annuity from the insurance company. This does not come out of your principal – if you invest $10,000, all $10,000 is invested and growing. And I do not charge an investment management fee on a MYGA, unlike a bond. A 5% MYGA will net you 5%, whereas a 5% bond will net you 4% after fees. So in this case, I think the commission structure is actually preferable for investors.

Is a MYGA right for you?

Most of my MYGA buyers are in their 50s and older and have a lot of fixed income holdings already. They don’t need this money until after 59 1/2 and are okay with tying it up, in exchange for the guarantees and tax-deferral benefits. They have other sources of liquidity and a solid emergency fund. When we compare the pros and cons of a MYGA to a high-quality bond, for some the MYGA is a good choice. If you are not a current client, but are interested in just a MYGA, we can help you with no additional obligation. I am an independent agent and can compare the rates and features of MYGAs from different insurers.

Many investors have been wishing for a safe investment where they can just make 5% and not lose any money. That used to be readily available 20 years ago, but disappeared after 2009 when central banks took interest rates down to zero. Today 5% is back and we can lock it in for 3-10 years with a MYGA. You can’t get that in a 10-year Treasury. Other bonds and CDs with comparable rates are probably callable. If you want a safe, non-callable, guaranteed 5%+, a MYGA may be for you.

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Safe Investing During Deflation

Safe Investing During Deflation

Posted On May 17, 2020 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

How do you begin to think about safe investing during deflation? Last week, the US Bureau of Labor Statistics reported that the CPI-U fell 0.8% in April. The Consumer Price Index is a basic measure of inflation and has almost always been positive throughout US History. Deflation is not a good environment for building wealth.

While this could be a temporary blip due to falling energy prices in April, we certainly are not out of the woods from the economic damage of the Coronavirus. With 20.5 million people filing for Unemployment in the last two months, there could be an extended reduction in consumer demand. And we know from Econ 101 that when demand shifts down, there becomes an oversupply of goods, and prices fall. That’s deflation.

I think that any deflation will be temporary and that the global economy will recover. But the amount of time this takes could be anywhere from months to years. And while I am studying projections of the depth and duration of this likely recession, my readers know what I think about expert predictions. They are wildly inaccurate. Trying to time the market based on economic predictions is likely to do worse than staying the course.

Deflation Is Anti-Growth

What might deflation mean for investors? Historically, stocks do poorly during deflationary periods. Commodities and Real Assets also can lose value. If millions of people lose their jobs and income, how are they going to afford a mortgage and buy a house? We know from 2008 that house prices can go down when people cannot buy houses.

No one has a crystal ball to know what will happen next. But, I think investors can and will want to make small adjustments to their investment portfolios because of the possibility of deflation. With the market rebounding incredibly well from the March lows, the upside versus downside potential in the near term has worsened.

It is okay to want to have some of your investments in a safe asset. The challenge that we discussed in the previous blog is that we are near zero percent interest rates today on cash, CDs, and Treasury Bills. While this would technically preserve purchasing power in a deflationary environment, we can do better and should be looking to grow.

Fixed Annuities For Capital Preservation

My suggestion for a safe yield today: fixed annuities. This week, I had a client purchase a 5-year annuity at 2.9%. That is 2.6% higher than a 5-year Treasury bond today (0.307%). Both are guaranteed, yet the annuity gets a bad rap. Sometimes, an annuity is the right tool for the job. Sometimes, it is not. Unfortunately, because some unscrupulous salespeople sold annuities which were unsuitable for the buyers, investors have negative perceptions.

I keep bringing them up because they are an objectively effective fixed income solution that many savers would appreciate. Because I want every investor to make informed decisions, here is what you need to know about Fixed Annuities.

Annuity Basics

  1. An annuity is issued by an insurance company and is a contract between the company and you. There are many flavors of annuities, but the kind I am discussing today are Fixed Annuities, specifically Multi-Year Guaranteed Annuities (MYGAs).
  2. A MYGA has a set term (3, 5, 7, or 10 years commonly) and a fixed rate of return. In this aspect, it behaves similarly to a CD.
  3. An Annuity is a tax-deferred retirement vehicle. You will not pay any taxes on the gains from the annuity, until you withdraw the money. At the end of the term, you can roll into a new annuity and continue to defer the gains. This is called a 1035 Exchange. There are no income restrictions or contribution limits to annuities.
  4. If you withdraw from an Annuity before age 59 1/2, there is a 10% penalty on the gains. Annuities are most popular with investors over 55, but younger people who know they are not going to need the money until retirement can also use a MYGA towards retirement saving. You can invest IRA money (Traditional, Roth, etc.) into an Annuity, too.
  5. There are often large penalties if you withdraw money from an annuity before its term is complete. For this reason, it is very important to have other sources of liquid assets. That way you can remain in the annuity for the full term.
  6. What happens if an Insurance Company fails? Annuities are insured at the State level by a mandatory Guaranty Association. In Texas, all insurers pay premiums to the Texas Guaranty Association, which protects annuity holders up to $250,000. This information is for educational purposes only and is not an inducement to buy insurance. If you have more than $250,000 to invest, spread your money over several insurance companies to stay under the covered limit.

How to Use MYGAs

A MYGA is a good substitute for a bond or bond fund. They offer safety and capital preservation, but with a higher rate of return than cash, CDs, or T-Bills available today. While there are some corporate and municipal bonds with higher yields, they are generally not guaranteed and carry risk that the issuer could default and be unable to pay. That’s especially a problem during deflation, as bankruptcies could increase significantly, causing losses to bondholders.

The main trade-off with MYGAs is the lack of liquidity. We want to keep annuity purchases to a reasonable size. I also recommend creating a 5-year ladder, where you divide your total investment into 5 pieces which will mature in 1,2,3,4, and 5 years. Then in each subsequent year, you will have access to 20% of your investment, should you need it. And what you don’t need, you can reinvest into a new 5-year annuity at the top of the ladder.

Lastly, for transparency, Annuities pay a commission. If someone purchases a MYGA from me, the insurance company will pay me a commission on the sale. I generally view commissions as a conflict of interests. However, I’d point out that a 2.9% yield on a MYGA is the net return to the investor.

There are no investment advisory fees for Annuities. For some reason, I don’t hear very many Investment Advisors mentioning that to their clients when they bash Annuities! I want what is going to be best for you. If that’s an annuity, fine, and if not, that’s fine too. echo The minimum investment on most annuities is $10,000, but if you have a smaller amount, let me know.

Stay Diversified, Increase Safer Positions

Safe investing during deflation can be a challenge. Low interest rates aren’t helping investors. I will continue to recommend diversified portfolios which may have 50% or more in stocks for long-term investors. Still, there is a role for safe investments for most portfolios, and many people may want to have more safe investments. They offer ballast against the risk of stocks and the diversification can give a smoother trajectory to your overall return.

Given the strong rebound we have had from the March 2020 crash, this may not be a bad time to reevaluate your risk profile. If that thought process has you wondering about safe investing during deflation, lets talk about MYGAs. I am an independent agent and can offer annuities from many different companies to find you the best features and rate for your needs.

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