Understanding MYGAs: Multi-Year Guaranteed Annuities

A Multi-Year Guaranteed Annuity (MYGA) is a type of fixed annuity that provides a guaranteed interest rate for a specified number of years. Similar to a Certificate of Deposit (CD), MYGAs are offered by insurance companies and are designed to provide a safe, predictable return on investment over the annuity’s term, which can range from two to ten years. MYGAs are particularly attractive for individuals looking for a low-risk option to preserve their principal while earning a steady interest rate.

How Does a MYGA Work?

When you purchase a MYGA, you agree to invest a lump sum with an insurance company. In return, the company guarantees a fixed interest rate over the term of the annuity. At the end of the term, you can either withdraw your investment along with the earned interest or renew the contract at a new rate. MYGAs typically require a minimum investment, which can vary by insurer, but common minimums range from $5,000 to $50,000.

Key Features of MYGAs

• Guaranteed Interest Rate: The primary attraction of a MYGA is its guaranteed interest rate, which is locked in for the entire term of the contract. This means that even if market interest rates fall, your MYGA rate remains unchanged.
• Tax-Deferred Growth: Like other annuities, MYGAs allow for tax-deferred growth. This means that you do not pay taxes on the interest earned until you withdraw the funds, potentially allowing your investment to grow more effectively over time.
• Surrender Period: MYGAs often come with a surrender period that matches the term length. If you withdraw funds before this period ends, you may be subject to surrender charges, which can reduce your overall return.

Pros of MYGAs

1. Safety of Principal: MYGAs are considered a low-risk investment since they offer a fixed interest rate and protection of your principal. This makes them appealing for conservative investors seeking to avoid market volatility.
2. Predictable Returns: With a MYGA, you know exactly how much interest you will earn each year, providing financial certainty that can help with planning future expenses or retirement needs.
3. Tax-Deferred Growth: The ability to defer taxes on interest allows your investment to compound more effectively, especially if you hold the annuity for several years.
4. Higher Rates Compared to CDs: MYGAs often offer higher interest rates than comparable CDs, making them an attractive option for those willing to commit funds for a longer period.

Cons of MYGAs

1. Liquidity Constraints: MYGAs typically have limited liquidity. Early withdrawals can result in surrender charges, which are fees for withdrawing money before the end of the term. Additionally, early withdrawals may be subject to income tax and a 10% penalty if you are under age 59 ½.
2. Inflation Risk: Because the interest rate is fixed, MYGAs may not keep pace with inflation over time, especially in longer-term contracts. This means that the purchasing power of your investment could decrease if inflation rises significantly.
3. Taxable Withdrawals: While the interest in a MYGA grows tax-deferred, any withdrawals are subject to income tax. This can result in a tax burden when you begin to take distributions, particularly if you are in a higher tax bracket in retirement.
4. Potentially Lower Returns: Compared to riskier investments like stocks or mutual funds, MYGAs offer lower returns. For those looking for higher growth potential, MYGAs may not be suitable as the returns are more modest.

Costs Associated with MYGAs

• Surrender Charges: If you withdraw money from a MYGA before the end of its surrender period, you will likely face a surrender charge. These charges typically decrease over time as you approach the end of the term.
• Fees: Insurance agents may earn commissions or annual fees from the sale of MYGAs, which can indirectly affect the rates offered. However, the commissions are usually built into the product, so you may not see them as a direct cost.
• Market Value Adjustment (MVA): Some MYGAs include a Market Value Adjustment clause, which allows the insurance company to adjust the surrender value if you make early withdrawals. This adjustment can work in your favor if interest rates have fallen but could reduce the amount you receive if rates have risen.

Who Should Consider a MYGA?

A MYGA may be a good option for individuals nearing retirement or those already in retirement who prioritize safety and stability over high returns. It is also suitable for conservative investors who want a portion of their portfolio to grow at a guaranteed rate without market risk. MYGAs can serve as an alternative to CDs or bonds for those willing to commit funds for a longer period.

Conclusion

A Multi-Year Guaranteed Annuity (MYGA) is a fixed annuity product offering predictable returns with low risk, making it a suitable choice for conservative investors. However, the liquidity constraints and potential impact of inflation on purchasing power are important considerations. Understanding the benefits, limitations, and costs of a MYGA can help you determine if it aligns with your financial goals and investment strategy. If you are considering a MYGA, it may be beneficial to consult with a financial advisor to explore how this product fits into your overall retirement planning.