Fluctuations in the stock market, high interest rates and unpredictable geopolitical events have made it more important than ever to find a predictable and stable source of income. Even though high interest rates have recently given a boost to traditional types of investments like savings accounts, certificates of deposit (CDs) and government bonds, these options often fail to offer a good balance of security and growth potential. If you find yourself in a similar situation, consider an insurance product called a Multi-Year Guaranteed Annuity (MYGA).
MYGAs offer a guaranteed interest rate for a specified period of time, typically ranging from three to 10 years. Unlike the variable returns you get with stocks or mutual funds, MYGAs provide a fixed return over a fixed period. This fixed rate ensures that the premium you pay the insurance company grows at a predictable rate, regardless of how the market is doing. Another advantage of MYGAs is that their compounding growth is tax-deferred.
How MYGAs Compare With Other Fixed Income Annuities and Investments
When exploring fixed-income options, Multi-Year Guaranteed Annuities (MYGAs) stand out for their unique advantages. Here’s how they compare to other annuities and investments.
Certificates of Deposit (CDs)
CDs are similar to MYGAs in that they offer a guaranteed return over a fixed period. However, MYGAs generally offer higher interest rates than CDs, especially during times when interest rates are low. Additionally, the interest you earn on MYGAs can grow without being taxed, whereas the interest you earn on a CD is typically taxed annually. For this reason, a MYGA will outperform a CD if your goal is for your money to compound over time.
Government Bonds
Government bonds are often considered safe investments, but their returns can be relatively low, especially when interest rates are low. Another drawback of government bonds is that the interest you earn is usually taxed annually. In contrast, MYGAs can provide higher guaranteed returns and offer the benefit of tax-deferred growth.
Fixed Annuities
While MYGAs are a type of fixed annuity, they differ from traditional fixed annuities in term lengths and rate guarantees. Traditional fixed annuities may offer variable interest rates over time, whereas MYGAs lock in a rate for the entire term. This offers stability and, in some cases, a degree of liquidity—unless your annuity restricts fee-free withdrawals.
How MYGAs Benefit Different Life Stages
Different life stages call for tailored financial strategies, and MYGAs can meet diverse needs. Whether you’re a young professional looking to diversify, a family saving for education or a retiree seeking a stable income, MYGAs offer unique benefits to help secure your financial future.
Young Professionals
Sarah, a 30-year-old marketing manager, wants to diversify her investment portfolio beyond just stocks and mutual funds. To achieve this, she chooses a five-year MYGA, which offers a higher interest rate than her savings account and provides an opportunity for tax-deferred growth. This decision helps Sarah build a secure financial base while she continues to invest in higher-risk assets. At the end of her five-year term, she can roll her MYGA contract into another one, maintaining her tax-deferred status.
Families
John and Lisa, a couple in their early 40s, are focused on saving for their children’s college education. They decide on a seven-year MYGA because it aligns perfectly with when they will need to access the funds. The guaranteed return gives them peace of mind, knowing that the money they need for their children’s college tuition will be there when the time comes.
Retirees
Michael, a 65-year-old retiree, seeks a safe way to guarantee a stable income stream for a set number of years while ensuring he can recover his entire principal at the end of the term. He invests a portion of his retirement savings in a 10-year MYGA, which offers a guaranteed interest rate higher than current bond yields. This contract provides Michael with a reliable source of income during retirement, and he can rest assured that his money will be available for future investments once the term concludes.
Is An Annuity Right For You?
Tax-Deferred Growth: A Key Advantage of MYGAs for High-Income Earners and Retirees
One of the primary benefits of a MYGA is its tax-deferred growth. The interest earned is not taxed until you withdraw the funds, enabling your earnings to compound more efficiently compared to taxable investments, where interest is taxed annually. For individuals in a high-income tax bracket or those already in retirement, this tax deferral can be particularly advantageous, as you may be in a lower tax bracket during retirement than during your working years. However, it’s important to note that early withdrawals from a MYGA (before age 59½) may incur a 10% federal tax penalty in addition to regular income taxes.
Adapting to MYGA Market Changes and Interest Rate Trends
The MYGA market changes frequently as insurance companies add new features and adjust interest rates. In recent years, we’ve seen more MYGAs offering flexible withdrawal options, as well as additional “high-band” MYGAs that provide higher interest rates in exchange for higher premiums or longer-term commitments.
Even in a high-interest-rate environment like we’re in now, MYGA interest rates tend to be competitive with other high-interest options such as bonds and high-yield savings accounts. Always research interest rate trends and product innovations to find the best opportunities. Be prepared to act quickly if you find a good rate, as MYGA interest rates can drop with little warning.
The Role of MYGAs in Diversifying Your Investment Portfolio
As part of an entire investment portfolio, MYGAs play a crucial role in diversifying your income and managing risk. MYGAs can protect your funds from market volatility and ensure that a portion of your portfolio will grow at a guaranteed rate. This diversification can balance the risks associated with more volatile investments such as stocks and real estate.
While MYGAs are not FDIC insured, they are backed by the insurance companies that issue them, and state guaranty associations provide an additional level of protection. MYGAs are also generally protected against liens and creditors, which may provide some level of personal liability protection. This makes MYGAs a relatively low-risk investment compared to other options.
Incorporating MYGAs for Reliable Income and Stable Growth
Adding MYGAs into your long-term financial plan can provide significant benefits, especially when it comes to ensuring a predictable income stream. For retirees, a predictable and reliable income stream can help to complement other retirement funds such as Social Security or pension payments. For younger investors, MYGAs can offer a stable growth component within a diversified portfolio.
Planning for the future involves creating a balance between risk and return, and MYGAs provide a tool for managing this balance effectively. These types of annuities offer peace of mind by guaranteeing that a portion of your portfolio will not only be preserved, but also will grow at a steady rate.
Early withdrawals from a MYGA may be subject to surrender charges and potential tax penalties, especially if you make withdrawals before age 59½. Be sure you understand the terms of the annuity contract — especially the withdrawal penalties — before you commit any funds.
No, the interest rate on a MYGA is fixed for the entire term of the annuity, so you can expect a predictable return on your investment.
MYGAs are considered relatively safe investments because they are backed by the issuing insurance company and protected by state guaranty associations. However, it’s important to choose a reputable insurance company to ensure they are still in business when you need to receive your payouts.
MYGAs generally offer higher interest rates than traditional savings accounts, and they benefit from tax-deferred growth. These two differences make them a more attractive option for long-term savings.
Guarantee financial freedom with an annuity.