by Jerry Yu- “The Family Money Doctor”
If you are a pre-retiree or retiree looking for risk-resistant ways to grow and protect your wealth, you might want to discover more about multi-year guaranteed annuities or MYGAs.
MYGAs are one kind of fixed annuity, differing from other fixed products mainly in the length of time their contracts guarantee the rate. MYGAs guarantee the fixed rate for the entire contract duration, which could be as long as ten years. On the other hand, traditional fixed annuities typically guarantee interest rates for only part of the contract term. This feature means you could buy a conventional fixed annuity with a five-year term, but the rate might be guaranteed only for the first three years.
MYGAs are sometimes referred to as “CD annuities” since they share some common benefits with certificates of deposit. These benefits include risk resistance, the time horizon of the investment, and guaranteed interest rates. Since a MYGA provides predetermined, contractually guaranteed rates for a specific time, it is often a valuable tool to supplement Social Security or other tax-advantaged accounts you may have.
MYGAs are a hot topic lately, especially given the economy’s many ups and downs. A growing number of financial experts now recommend MYGAs as one strategy for buffering against the
chance you’ll outlive your income in retirement. Multi-year guaranteed annuities are considered a safer way to grow your money since they don't
correlate to the stock market. Also, MYGAs give you a tax advantage because no tax is owed on the growth until you start getting payments.
How do MYGAs work?
Just like other types of annuities, purchasing a MYGA involves signing a contract with an annuity company where you agree to pay the company a sum of cash in exchange for a
guaranteed fixed interest rate. You'll get that rate on your contribution for a certain agreed-upon period, typically from three to ten years or any number of years between.
MYGAs use a lump sum of money set aside so that it will accumulate interest. Depending on the design of your particular MYGA, you may encounter fees called surrender charges if you must withdraw money from an annuity before the accumulation period is over. Most MYGA providers have a workaround for accessing a portion of your money that may include penalty-free withdrawal provisions. These provisions allow you to make partial withdrawals before the surrender period ends without fees and penalties.
When your accumulation period ends, you either receive the premium and interest earned or may choose to renew your contract. You should be aware that if you continue the contract, the guaranteed rate may differ from your original rate. Some retirees choose another option, using a 1035 Exchange to transfer money from one annuity into another type of annuity. Using a 1035 exchange protocol, you can make this transfer without paying taxes.
How do you add a MYGA to your retirement plan?
As with any financial product, it is necessary to do your due diligence and thoroughly research your options before signing an annuity contract.
Annuities can be somewhat complicated, even for savvier pre-retirees and retirees. As a first step to understanding the pros and cons of this powerful product, it’s a wise decision to consult a financial advisor specializing in safe money and retirement income. Your advisor will look at your current situation, goals, and risk tolerance, among other things. They will help you determine how much you want to invest and what you want your annuity investment to do for you. You will want to set aside time for comparison shopping, considering both the strength and quality of the annuity’s issuing company and the details of each MYGA product offered.
Suppose your annuity specialist only offers one or two MYGA selections or tries to up-sell you to a product with a higher commission for them but fewer benefits for you. In that case, you should seek out a second opinion.
Yu’s Views: In an era of uncertainty, multi-year guaranteed annuities can offer some attractive benefits to seniors. Since MYGAs don’t correlate to the stock market, you won’t incur volatility the way you can with other assets. MYGAs are more flexible and liquid than most people believe. Your MYGA could offer a provision allowing partial withdrawals without penalties or fees. MYGAs also allow your money to grow tax-deferred, meaning you won’t pay any taxes until you begin withdrawals.
MYGAs may be ideal for someone closer to retirement who wants some growth but is wary of exposing too much money to risk. MYGAs do, however, have some possible downsides of which you will need to be aware, including less access to your money. MYGAs and other annuities can also be somewhat challenging to understand. Your best chance of incorporating an annuity into your retirement plan successfully rests on you performing due diligence and seeking the advice of a safe money expert.
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