Annuities are just one of the many potential retirement options that couples and individuals can use to fund their post-work years. Annuities are available in a variety of types, and choosing the right one for you is made easier when you understand all of your options and how each annuity works.
Here is what you need to know about the multi-year guaranteed annuity including how it works, the rates you can expect and the risks you should prepare for.
What Does “MYGA” Mean?
MYGA stands for multi-year guaranteed annuity. It may be considered by some as an investment vehicle, and in some ways it is; however, a MYGA is actually an insurance product. You, as the client, will enter into a contract with an insurance agency; that contract will specify how long you intend to leave your money with the insurer.
MYGAs are similar to certificates of deposit; you contribute a lump sum, and then that money grows for a set period of time (as agreed upon in the contract). The difference between these two products is that, unlike CDs, your money grown within the MYGA is tax-deferred. This means that you do not have to pay taxes on the growth until you receive that money. The annuity keeps a larger lump sum growing for longer, so your money continues to work for you.
What Rates Do MYGAs Usually Provide?
The purpose of a MYGA is to help your money grow over time without exposing it to the same risks you could have when investing in the stock market or other similar options. As an additional advantage over certificates of deposit, MYGAs also tend to provide higher interest rates as they grow.
The interest rate you secure for your MYGA will depend on a variety of factors, including the company you choose. However, one of the most effective ways to secure the highest interest rate possible is to commit your money to a MYGA for as long as you are able. Ten years is typically the upper limit of MYGA terms and usually offers the best interest rate.
As of today, 10-year MYGAs will provide approximately 4.6% in interest. Some may go slightly higher, nearing the area of 5.15% or 5.25%, while others may sit closer to 3.95%, but 10-year MYGAs are often right around this benchmark. Most MYGAs will compound their interest yearly, adding it to the balance so that the next year sees more growth.
The shorter your MYGA, the lower the rate. Five-year terms often yield approximately 4.40%, while three-year options are at, or about, 4%. A two-year surrender period, which is as short as MYGAs, will typically allow offers 3.6%, on average. These are current estimates and should be confirmed prior to purchase of any product.
What Are the Risks of Using a MYGA?
MYGAs are considered a low risk form of funding your retirement, but that does not mean that they are entirely without risk. Withdrawal fees are a critical element to consider. If you want to remove your lump sum balance from a MYGA before the term is over, you may pay substantial fees, if you are even allowed to remove the money at all. MYGAs are best for those who will not need access to the initially designated funds for the duration of the term.
Additionally, the federal government does not guarantee MYGAs. If the insurance agency to which you trusted your MYGA goes bankrupt and is unable to pay you, the Federal Deposit Insurance Corporation (FDIC) will not reimburse you.
Your state association can pay for claims should your insurance agency go bankrupt, but be aware that there is a statutory limit to how much they are able to pay. Usually, this is approximately $250,000. If you had more than this amount in your MYGA, you may not be able to be fully reimbursed. Be sure to carefully research the insurance agency that you choose to hold your multi-year guaranteed annuity in order to better shield yourself against the risk of loss.
Take Your Retirement into Your Own Hands with Pillar Life Insurance
If you believe that a multi-year guaranteed annuity or other type of annuity product is the right choice for some or all of your retirement needs, trust a reputable insurance company. You know what is the best decision for your personal situation, which is why Pillar Life Insurance offers a self-service portal that allows you to take control of your own financial goals. Fill out your information in our portal to get started and establish the annuity that meets your future needs.
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