What to Expect From a Multi-Year Guaranteed Annuity (MYGA)
- A multi-year guaranteed annuity (MYGA) is a low-risk investment with guaranteed returns. Explore the benefits of MYGAs and how they compare to other accounts.
If you’re nearing retirement age and looking to round out your current investments, one option to consider is a multi-year guaranteed annuity (MYGA). Because MYGAs are low risk and offer guaranteed returns, they may be ideal for supplementing Social Security payments or a pension, providing additional income for retirees. However, these annuities may not be ideal for everyone. Here are a few things you should know before investing in a MYGA.
What Is a Multi-Year Guaranteed Annuity (MYGA)?
A multi-year guaranteed annuity (MYGA) is an investment account that contractually guarantees investors a fixed interest rate and annual yield over a period typically lasting between 1 and 10 years. These accounts are funded with a lump-sum payment, and interest, which is compounded each year, is tax-deferred.
Although a MYGA is similar to a CD, it’s purchased through an insurance company rather than a bank and typically has a higher return rate. Interest rates for MYGAs fluctuate daily based on the market and can vary by insurer and plan duration. However, once the account is opened, the rate is locked for the duration of the plan.
How Does a MYGA Work?
When an investor signs the contract for a MYGA, they lock in the current interest rate, which is then fixed for the life of the account. The contract also specifies the duration of the MYGA, any surrender penalties that may be incurred for early withdrawal and the rules regarding renewal of the contract once the accumulation period ends.
The investor then funds the account with a lump-sum payment, which accrues interest up to the surrender date. If an investor needs to withdraw money before the surrender date, they may be subject to surrender charges. However, some carriers may permit partial withdrawals without penalizing the account holder.
After the accumulation period ends, the account holder may collect their original premium, plus whatever interest it has earned. Some MYGAs may also offer investors the option of renewing the contract; however, the renewed plan typically has a different interest rate. Account holders may also transfer funds from a completed MYGA into a new annuity.
What Is the Difference Between a MYGA and a Fixed Annuity?
Technically, a MYGA is a type of fixed annuity. However, whereas a traditional fixed annuity typically only guarantees the rate of return for a portion of the account’s duration, a MYGA guarantees the rate for the entirety of the account’s life. For example, if you purchase a 5-year MYGA, the guaranteed rate stays in effect for the entire 5-year period. If you purchase a 5-year traditional fixed annuity, the guaranteed rate may only be effective for the first few years of the contract — after which time the rate may be adjusted.
What Is MYGA Laddering?
MYGA laddering is an investment strategy that involves the purchase of multiple MYGA annuities with staggered contract lengths. Each of these accounts forms a rung of the ladder. For example, an individual could split their investment equally between MYGAs that have 3-, 5-, 7- and 9-year rate guarantee periods. As each MYGA matures, the investor could reinvest at an additional 2-year interval. As the account holder reinvests, the rungs begin to form a ladder. This strategy may be continued indefinitely.
Is Your Money Safe in a MYGA?
A MYGA is typically considered a safe investment. That’s largely because most carriers offer fixed interest rates, which aren’t affected by market volatility, unlike stocks and bonds.
However, because MYGAs aren’t issued by banks, they aren’t guaranteed by the FDIC, which means account holders can lose money if the issuing company goes bankrupt. In these cases, state guaranty agencies guarantee payment up to a state’s legal limit, which is typically $250,000. Investors will lose any amount above that.
How Does a MYGA Compare to Other Investment Accounts?
Although a MYGA can be a great choice for investors who want a well-rounded retirement portfolio, it may not be the best option for everyone. Here’s a brief overview of several types of investment accounts and how they compare to MYGAs.
- CDs: Certificates of deposit, usually referred to as CDs, are bank accounts that offer individuals a higher interest rate than traditional savings accounts in exchange for leaving funds untouched for a predefined period of time. Like a MYGA, a CD has a guaranteed fixed interest rate and offers premium protection on your investment dollars. Plus, because CDs are purchased through banks rather than insurance companies, they’re insured by the FDIC. However, a CD doesn’t provide investors with tax-deferred growth, and individuals who need to withdraw money before the account's maturity date must pay penalties.
- Bonds: Bonds let governments or corporations raise capital by borrowing from investors. In return, the entity pays back the investment with interest over a set period of time. Unlike MYGAs, bonds don’t offer tax-deferred growth, and in some cases, they can actually lose value over time, making them a riskier investment. Plus, because bonds are typically purchased through brokers rather than banks, they aren’t FDIC insured. However, bonds can help investors diversify so their portfolio is better able to withstand market fluctuations.
- Stocks: When you buy stock, you’re buying an ownership share in a company. Investors who purchase stock earn money through dividends, which are the distributions a company makes to shareholders when they’ve been profitable, or capital gains, which happen when an investor sells a stock for more than they paid for it. However, unlike MYGAs, earnings aren’t tax-deferred. Additionally, stock offers no premium protection, so investors can suffer capital losses if the price of the stock drops.
- IRAs: Like MYGAs, individual retirement accounts are designed to offer tax-advantaged income growth for investors. IRAs are FDIC insured and typically offer more investment choices than 401(k)s, letting account holders tailor their plans to suit their investment tolerance and financial goals. However, unlike MYGAs, IRAs typically don’t guarantee premiums or interest rates and investors may have to pay penalties for early withdrawal.
Deciding What Type of Account Is Right for You
Before investing, it's important to evaluate your overall financial goals and needs. To form a complete picture, you should consider your investment budget, anticipated retirement needs, time horizon and overall risk tolerance. A reputable financial advisor can help you decide what type of investment is right for you and how much money you should plan to allocate so you can comfortably reach your goals.