MYGA’s can help turn your savings into income in retirement.
by Paul Hubbard III
Like most retirees, you may realize you need a way to transform your savings into income you can use when you no longer work. You’ve also probably heard a lot of misinformation and negativity about the best vehicles to accomplish that transformation.
Turning savings into income is critical in successful retirements, differing significantly from how funds are accumulated. If you anticipate that you still have a few years of work left and worry about making mistakes with your money from which you will not have time to recover, it makes sense to start discovering your options.
Turning your savings into income streams requires a different mindset and tools, such as annuities, that you may need help understanding. It makes sense to learn more about every income product that could help you transform savings into income. When you discover more, you can ask your advisor the right questions. After all, you always want to make money choices that align well with your goals, values, and risk tolerance.
Modern annuities, for example, are exceptionally flexible and customizable, fitting well into various income strategies. As you may know, annuities are widely-available, contractually-guaranteed products often used to create income streams. One of the more popular annuities is the multi-year guaranteed annuity or MYGA.
MYGAs are in the “fixed” annuity family, offering contractually guaranteed, predetermined interest rates. MYGAs are one way for retirees to supplement their Social Security benefits or other tax-advantaged or company-sponsored accounts.
As mentioned, MYGAs are fixed annuities, offering a set interest rate not correlated to the stock market. The essential difference between a MYGA and a traditional fixed annuity product is the length of the rate guarantee. In a conventional fixed annuity, the rate guarantee may last only for a portion of the contract’s term. For example, you could purchase a fixed annuity with a ten-year duration, but the rate guarantee may only cover the first five years. MYGAs guarantee your rate for the entire contract term, usually between one and ten years.
As fixed products, MYGAs differ significantly from another commonly sold type- the variable annuity. Variable annuities try to approximate investment accounts by taking the money you deposit and investing it in a selection of funds. Variable annuity funds vary according to risk levels and allow you to choose the most comfortable risk level.
Variable annuities are inherently riskier than fixed products and, depending on what you need your money to do in retirement, may not be worth the additional risk, even if higher gains are possible. Some retirees choose MYGAs or other fixed products over variable annuities to avoid situations where they could lose money.
At its’ core, a MYGA is one of the more accessible safe money products to
include in your strategically-designed retirement portfolio. A MYGA provides principal protection and a guaranteed interest rate, making creating a predictable, consistent income stream easier. MYGAs have very few “moving parts” to decipher. They also do not have yearly fees.
MYGA rates are almost always higher than certificates of deposit (CDs), and your account grows tax-deferred. Unlike CDs, which require you to pay taxes annually on any credited interest, MYGAs grow tax-deferred. MYGAs, as mentioned, are not impacted by stock market volatility and give you complete protection for your initial investment.
Another often-overlooked benefit of Multiyear Guaranteed Annuities is the ability to transfer one MYGA (if it is in a non-IRA account) to another MYGA without creating a taxable event through what’s known as a 1035 exchange. You can also exchange your MYGA for a different kind of annuity if, for instance, your circumstances change and you need your payouts to start sooner or later than you originally planned.
MYGAs work well in “laddering” scenarios.
Current CD owners might benefit from adding a MYGA to the principal-protected, fixed-rate portion of their retirement portfolio. Of course, you’ll need to research an issuing company’s claims-paying ability before selecting any particular MYGA.
Once you’ve found a product you like, you and your advisor can develop a laddering strategy to help you get the most from both. Adopting a laddering strategy entails purchasing MYGAs or a combination of MYGAs and CDs with staggered rate guarantee periods over several years. When those products are near the end of the 30-day penalty-free period, you take the proceeds and place them into another MYGA that better fits your needs. The 1035 exchange rule I mentioned before helps you accomplish this step. It’s important to note that this reinvestment is tax-free.
Here’s one scenario. Say you had $400,000 available for building a MYGA/CD ladder, and your objective was to ensure the highest contractual yields for each rung of the ladder, it might look similar to this:
1- Year CD @ $100,000
2- Year CD @ $100,000
3-Year MYGA @ $100,000
4 Year MYGA @ $50,000
5 Year MYGA @ $50,000
Ladders are customizable to help you attain specific safety goals. You have some liquidity since you can take penalty-free withdrawals of up to 10% once the ladder is in effect. A ladder constructed with MYGAs also gives you a degree of protection against rising interest rates. If interest rates rise, you could buy higher-yielding MYGAs with your annual income. You could also do this when a MYGA in your ladder matures.
MYGA ladders have some downsides, though. To make a laddering strategy work, you’ll need to commit additional time and effort to their maintenance. However, a MYGA ladder may reward your efforts by giving you a more stable foundation for your retirement income.
To discover more about MYGAs and the MYGA laddering strategy and how they can work to give you more peace of mind when you retire, consult your retirement income expert. Be sure to seek an income specialist with particular expertise in designing ladders.
In other words,
Better Call Paul!