By Orlando McCall
As our economy continues its downward trajectory, the days of endless yield-chasing may end.
In such economically uncertain times, individuals seek financial instruments that offer stability,
security, and cash preservation. One financial tool that many pre-retirees and retirees choose is a
multi-year guaranteed annuity or MYGA.
MYGAs are one of several fixed annuities that supply guaranteed retirement income streams.
Typically funded with a single premium payment, MYGAs guarantee set interest rates for terms
usually running three, five, seven, or ten years. MYGA earnings, like other annuities, are tax-
deferred until you start withdrawals. As with other kinds of annuity contracts, you may pay a
significant surrender charge if you withdraw funds before the end of your term.
How does a MYGA work?
MYGAs are contracts issued by an insurance company. When you make a lump sum payment,the annuity issuer guarantees a fixed interest rate on your contribution for a specific time.
Depending on your contract, you may have some provisions that allow you to make penalty-free partial withdrawals before your surrender period ends. At the end of what is known as the
accumulation period, you’ll get the premium paid and any interest earned.
Some MYGAs may also allow you to renew the contract. If you choose a renewal, you should note that the guaranteed interest rate might differ from your original contract. Some seniors also
opt for what’s called a “1035 Exchange.” A 1035 exchange lets you transfer money in your MYGA into another annuity without tax penalties.
Orlando’s Op: While it’s true that MYGAs are some of the easiest-to-understand products in the vast constellation of annuities, it is a wise idea to have a qualified retirement income specialist review the details of any annuity or other financial product you may be considering. Before signing on the dotted line, understand what you want and need this product to do for you and how your particular contract works.
Pros and cons of a MYGA
If you’re looking for a calmer place in the financial storm, MYGAs offer some excellent benefits.
MYGAs may be less risky: Since a MYGA is not tied to the stock market and offers a
guaranteed interest rate for the contracted term, it’s considered by many financial experts to be less risky than other types of annuities.
MYGAs offer some flexibility and liquidity. You may hesitate to add an annuity because you believe annuities lock up your cash and are unavailable when you need them. This
isn’t always the case, however. Many MYGA issuers offer you a way to make partial withdrawals without penalties. MYGAs are tax-advantaged. A multi-year guaranteed annuity grows tax-deferred until you begin your withdrawals. This feature can help you grow your wealth more quickly and predictably.
MYGAs usually offer better rates than CDs. Many in the financial services industry consider MYGAs equivalent to certificates of deposit (CDs). A MYGA offers a
contractual annual yield for a specified time, like a CD. However, MYGAs give you two distinct advantages. For one thing, most MYGAs provide better rates of return than CDs.
Another plus for MYGAs is that interest grows tax-deferred, unlike a CD. Like all financial tools, MYGAs do have some potential pitfalls. And, although risks are
relatively low with a MYGA, there are still a couple of things you need to consider before purchasing. Remember that, unlike CDs, The FDIC or any other federal agency does not insure MYGAs. That’s one reason you’ll want to spend time researching the issuing company of your chosen MYGA. In the unlikely event an issuing company goes bankrupt, the federal government won’t guarantee you won’t lose your money. However, MYGAs have state-level protections provided by state guarantee associations that will pay claims up to an average of $250,000.
As previously mentioned, if you need to withdraw cash from your annuity before the end of your contract, you could get hit with withdrawal and surrender charges. You must understand the
terms of your agreement.
Summing up: In this age of financial chaos, adding a multi-year guaranteed annuity (MYGA) or other annuity to your portfolio might make sense. However, you should seek advice from a financial advisor who makes recommendations on your unique situation. If you would like some free expert advice, contact me today. I’m always glad to help.
PS: Did you know that “Sequence of Returns” risk is a very clear and present danger to many retirees’ wealth. Don’t leave your retirement to chance. Get my free download that explains sequencing risk and gives you a plan for combating this all-too-common wealth destroyer. ”
