In retirement, you have to start living off the money you have saved for decades. Many times, this leads to people in or near retirement having extra money just sitting in savings, making very little in interest.
While you don’t want to put this money anywhere risky, as you are more likely to need it, you also don’t want to let too much just sit there. That’s where MYGAs, or Multi-Year Guaranteed Annuities, come into play.
MYGAs are simply a tool to earn higher interest on your savings. It gives you a predetermined and guaranteed interest rate for a set period of time, allowing you to create an additional savings bucket in retirement.
Retirement Income: Multi-Year Guaranteed Annuities
MYGA (Multi-Year Guaranteed Annuity) Basics
You might have heard the term “CD Annuity” used before, and what this term is referring to is a MYGA. A MYGA is not FDIC-insured like Certificates of Deposit are, but they are guaranteed by the insurance company.
A Multi-Year Guaranteed Annuity is technically a fixed annuity since it offers a fixed interest rate, even though the length of time is shorter than a traditional fixed annuity. It also is not for income generation like most annuities; MYGAs are for accumulation.
A MYGA has a typical term of between 2 years to 10 years, with 5 years being the most common.
You purchase a MYGA with a single up-front deposit. You can even use qualified money, like money from an IRA or 401k account.
MYGAs have to be approved at the state level, so not every state is going to have every product and interest rate available.
There are no hidden fees; you will see up front how much your money will be worth at the end of the term and the fees are included in this.
How does a MYGA work?
So what should you do if you are interested in a MYGA?
First, you need to look at the offered products in your area. Keep in mind that many different companies offer this product, so make sure to shop around. This is best done with a broker who has multiple options to sell from.
Interest rates are going to range anywhere from a little over 1% to over 3.5%.
Typically, you are going to get a higher interest rate if you pick a longer term. The most common term we sell to our clients is 5 year, but you can choose anywhere from 2 years to 10 years.
Once you transfer over a lump sum of money, which can range anywhere from around $15,000 to a max of $1,000,000, and just leave it there until the end of the term.
Can I get out of a MYGA if I don’t want it anymore?
MYGAs provide some liquidity, commonly making 10% of the cash value available annually if you are over age 59 ½.
You can choose to have more liquidity on your MYGA, but it does come at a cost. Typically, you are going to take a lower interest rate for more freedom with what you can do with the money while it is with the insurance company.
What do I do when my MYGA term ends?
When the term on your MYGA ends, you have a few options.
First, you can just take the money. If you do this, you are going to have to pay taxes as MYGAs are tax-deferred.
If you used qualified money that you have not paid taxes on yet, like an IRA or 401k, you are going to have to pay taxes on the initial deposit as well as the interest.
If you used non-qualified money, or money you already paid taxes on, you will only have to pay taxes on the gains.
If you don’t need the money right away, you also have the option to just renew that same policy. Be aware, the interest rate might be different from when you initially signed up for it.
If the interest rate has changed, or if better interest rates are available elsewhere, you can transfer the money into a higher-yielding MYGA.
Laddering MYGAs is a strategy some use in order to have money mature at different times. For example, say you take $150,000 and split it between a 3 year, 4 year, and 5 year MYGAs, putting $50,000 in each.
Every year, you have the choice to take the money if you need it, or if you don’t, you can reinvest the money and continue the ladder. This strategy allows you to make a little more interest than a savings account and still have access to some money if you end up needing it.
Who is a MYGA good for?
A MYGA is really designed for people who are close to or in retirement. If you are younger, you are typically going to find better returns with a savings vehicle like an investment account of stocks and bonds.
MYGAs are perfect for people who want a decent return with a minimal amount of risk, especially because they are in the years where they are living off their savings.
Most retired clients we see have a significant amount of money just sitting in their savings account “just in case”. It is typically more money than you would need for an emergency situation.
We have a client who we have worked with for 7 years. She has $75,000 in savings that has not decreased at all over the time we have been working with her, even though she is in retirement and living off this money. We know her finances and are sure that she will be able to part with some of this money and make a little extra in interest by putting it into a MYGA.
After discussing her options, she picked a 3 year MYGA as she was comfortable with having limited access to this money for this time period.
After a recent downturn in the market, she was very appreciative that her money was still earning a fixed interest rate that was not decreasing.
At the end of 3 years, we will reevaluate and see if the best option for her is to roll it into another MYGA or to withdraw some of the money.
MYGAs also work well for retirees who have a low risk tolerance. They are guaranteed an interest rate and you can pick whatever term they are comfortable with.
MYGAs are a great option for many in retirement. Don’t let the word annuity scare you; learn more about this product and see if it might work in your retirement plan.
Cardinal can talk to you today about if a MYGA might be or might not be right for you.