MYGAs: A Good Friend in an Unfriendly Interest Rate Environment
Written By: John M. Bellinger in Plymouth, MA
With apologies (and thanks) to The Temptations and “My Girl”….here are the lyrics for “MYGA“:
I’ve got peace of mind—every single day.
When the markets fall, I know I still can play.
I guess you’d say
What can make me feel this way?
MYGAs (mygas, mygas)
Talkin’ ‘bout MYGAs.
I don’t need no bailout, workin’ or shame.
I’ve got all the security one man can claim.
I guess you’d say
What can make me feel this way?
MYGAs (mygas, mygas)
Talkin’ ‘bout MYGAs.
Peace of mind in retirement, that’s what I need.
Knowin’ what’s there tomorrow, don’t need no greed.
I guess you’d say
What can make me feel this way?
MYGAs (mygas, mygas)
Talkin’ ‘bout MYGAs.
Multi Year Guaranteed Annuities (MYGAs) are most often compared to bank CDs, because they serve the same purpose as a certificate of deposit. That is, they pay a fixed rate of interest for a specific number of months or years. When you purchase a MYGA, you give a specific amount of money to an insurance company and they, in turn, guarantee you that your money will earn a specific rate (of compound interest) for a specific number of years.
There are some significant differences between MYGAs and CDs:
- CDs are issued by banks, while MYGAs are issued by insurance companies, so CDs are FDIC insured up to $100,000 for non-retirement accounts. MYGAs, while not FDIC insured, are protected by (individual) state reserves. State safeguards range from $100,000 to $300,000, so be sure to know what protection your state provides.
- CDs cannot be moved from one institution to another without incurring taxes, while MYGAs can be transferred or “rolled-over” to another annuity through what’s known as a 1035 exchange and no tax liability is triggered by the transfer. Also, a CD will generate an income statement every year with a resulting tax liability.
- A typical MYGA allows a partial withdrawal up to 10% of the initial investment. If unexpected needs or expenses occur, this flexibility can be huge when you consider liquidating a percentage of a CD typically requires you to cash out the whole thing thus incurring what could be a sizable surrender charge.
A recent survey from Go Banking Rates found the average APY on U.S. Savings accounts is currently 0.21 percent, and an estimated $6 trillion sits languishing in interest bearing accounts earning less than 1 percent. When asked why, people who got clobbered in 2008 typically will reply, “I simply don’t know where else to put my money that’s safe.”
Distinction must also be made between MYGAs and Fixed Annuities, also very popular among conservative investors and seniors. In this volatile market, however, uncertainty is not desirable to people who crave the certainty of knowing they will be receiving a specific rate of interest that outpaces anything they could earn in a typical interest-bearing account.
With a MYGA, you know what you’re getting and exactly what that asset will be worth at the end of the term. With many “Fixed Annuities,” you might receive a favorable rate in year 1, but that rate might not be locked in for the duration of the contract. So after the first year, your return might go up or possibly go down. If you have purchased a 10 year contract, you’re at the mercy of unknown interest rate changes (good and/or bad) for the next 9 years. With a MYGA, transparency rules. “What you see is what you get!”
In determining whether a CD, Fixed Annuity, or MYGA is best for you—–well, that depends. Factors such as your age, tax status and goals all must be considered. In addition to the withdrawal provisions in a FA or MYGA, the benefits of tax-deferred growth, the options for your beneficiary with an annuity should you die before the contract ends, and the typically higher interest rates offered vs. CDs cannot be downplayed or ignored.
In an economic environment where the only certainty seems to be uncertainty, however, it’s comforting to know you can still find a little piece of mind and make a few tax-advantaged dollars at the same time.
I guess you’d say
What can make me feel this way?
MYGAs (mygas, mygas)
Talkin’ ‘bout MYGAs.
About the Author: John M. Bellinger is an insurance agent and annuity consultant living in Plymouth, Massachusetts. With over 30 years experience in the financial services industry, John is committed to the idea that relationships are the key for success in any aspect of life. Contact John directly at (617) 962-1367 or jbellinger24@comcast.net with any of your annuity questions.
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