Multi-Year Guaranteed Annuities
Once you understand the basics: that an annuity is a type of financial instrument sold by an insurance company that will allow you to invest money without volatility of the stock market and with a guaranteed return on that investment, you can more easily understand a Multi-Year Guaranteed Annuity.
With an annuity, you will make monthly contributions to your investment and expect regular, fixed returns.
So, what is a Multi-Year Guaranteed Annuity, or MYGA, then?
What is a MYGA?
A Multi-Year Guaranteed Annuity (MYGA) is an annuity that you purchase from an insurance company for a specific number of years, anywhere from 3 to 10, that pays out a guaranteed interest rate every year.
Once you sign a contract with the insurance company, your monthly payment is established, and your money is locked in for the entire term, earning interest for the duration.
Further, the interest is reinvested into your annuity each year, and compounded. That means that each year, your interest rate is based on whatever the current balance of the annuity is, rather than the original balance.
Is a MYGA a CD?
Most commonly, a MYGA is compared to a CD, or a Certificate of Deposit like you would get at a bank. The difference is, a CD is a type of savings account, and a MYGA is an insurance instrument.
The similarity is that both offer fixed interest rates and guaranteed returns. They are also both typically locked into their investment for the specified period of time. You will pay a penalty if you aim to withdraw your funds early.
There are some exceptions to the penalty rule. Some annuities will allow you to withdraw 10 percent of your investment after the first year without penalty.
The benefits of a MYGA over a CD is that you can typically get a higher interest rate, and you may be able to withdraw some of your funds early without penalty.
But you probably won’t want to withdraw early because one of the highest selling points of a MYGA is that they are tax free instruments, like many other retirement products, until you start withdrawing.
If you do decide to withdraw you MYGA early, you will pay, most often, not only a penalty but also the taxes on what will be considered “income.”
Another benefit of the MYGA over a CD is the ability to grow your money tax free, whereas any money you have in a CD is taxed for the duration of its time in the CD.
Frequently Asked Questions
Who is a MYGA for?
A MYGA is typically for older people closer to retirement who want to minimize risk and grow their wealth tax free.
Because you can be sure your investment will pay out, it has low to no risk involved. You can sign the contract and rest assured that your monthly premium payments will come back to you, plus interest and even plus a premium sometimes.
If you have 5 to 10 years left until retirement and you’ve maxed out your IRA contribution and 401k, a MYGA is a great addition to your retirement investments because there are no limits as to how much you can contribute, so you can build up your retirement savings before you finally decide to retire.
How is a MYGA different from other fixed annuities?
While you can get other fixed annuities that are not multi-year guaranteed, the primary difference is the interest rate for the term of the annuity.
With a MYGA, you get the interest rate you begin with for every year of your contract. With other fixed annuities, even if you have your money locked in for 10 years, you may only get your original interest rate for the first 3 years, at which point it can change.
What are interest rates on MYGAs?
The interest rate on a MYGA is relatively high for a fixed interest rate guaranteed “savings” account.
You can typically get as high as 3%, whereas CDs come in much closer to 1%.
While you may earn a much higher interest rate on a mutual fund or an index fund, you are also taking much larger risks there, in the stock market, than with a fixed annuity that is contractually obligated to payout.
Essentially, with a MYGA, you are investing in that insurance company, and they are paying you for that investment. Think of it like a bond.
Is there really no risk?
While a MYGA is much less risky than putting your money on the stock market, there is always the, very low, risk that the insurance company will go under.
This risk is one of the other differences between a MYGA and a CD. A CD is FDIC insured, which means even if the bank goes under, the federal government is guaranteeing your money will be safe.
Insurance companies are not FDIC insured, so you don’t have that extremely high level of protection.
However, insurance companies are required to belong to their state’s guaranty association, which offers a similar level of oversight and protection. It is unlikely that the insurance company will go under is the bottom line.
Should you get a MYGA?
The answer to this question is always going to be “maybe” or “it depends.”
If you are close to retirement, your contributions to your IRA and/or 401k are already maxed out, and you are looking for another, safe, way to build up your retirement savings, a MYGA is a great option to consider.
The best thing you can do is meet with your financial advisor and discuss how much you want to contribute and for how long. You may decide to be a bit more risk tolerant and potentially grow your wealth a bit more.
Or you may simply decide to shop around for the highest interest rate MYGA with no penalties in case you change your mind.
There are several factors to consider, and you should at this point always have a smart and reliable advisor on your side.
Have a Question?
At How Annuities Work, we’ve got an annuity pro ready to answer all your annuity questions. Contact us today.