Annuities are just one part of a total retirement picture for many people. Conventional wisdom tends to gravitate toward recommending that you park your money in MYGAs for as long as possible before converting over to a fixed annuity and receiving your payments.
While this works for many people, it is not always the right choice and may involve some risk. Here is a look at what you need to know about the financial benefits of choosing a two-year MYGA over a product with a longer term.
What Is a MYGA?
A MYGA is a multi-year guaranteed annuity which is a type of annuity product that maintains a fixed rate over a set period of time. While the multi-year guaranteed annuity will not pay out in repeating payments, it can be converted to another annuity once the term is over. Instead, the benefit of a MYGA is that it provides the ability for your money to accumulate and grow with a guaranteed rate.
MYGAs come in terms of varying lengths; the shortest is typically two years, and the average upper limit is between seven and ten years. Some insurance companies may offer MYGAs that last upwards of 15 years or longer, but these are rare.
What Do Terms Impact in a MYGA?
When people research MYGA annuity rates, one of the most common details that they will find is that the longer the MYGA term, the better the rate overall. Bond yields are usually higher at longer maturities and the insurance company is usually investing its assets in bonds.
Thus, MYGAs that are only two years long tend to have the lowest accumulation rates, with MYGA annuity rates topping out at around seven years on average. Today, with the Federal Reserve Raising rates, a shorter term MYGA may yield almost as much as a longer term contract.
The rate on a MYGA is important, because this is the central element of the calculation that determines how much your money grows while it is sitting in the MYGA. A higher rate over a longer time means a greater chance to accumulate before your payout.
Why Choosing Short Term MYGA Annuity Rates May Be Useful
Given this information, many people assume that choosing a longer-term MYGA is the best option. However, short-term MYGAs have their own set of particular advantages, and they may be the right choice for certain portfolios.
One of the biggest advantages of a short-term MYGA is relative liquidity. Annuities keep your money in one place; if you need to withdraw your entire balance before the annuity’s term is complete, you will be faced with significant fees and may find it difficult to claim the money at all.
Some annuities offer the ability to withdraw up to 10% of the balance each year, but if you suspect that you may face large expenses for which 10% is not enough, locking your money into a long-term annuity could be a risk.
Instead, short-term MYGAs allow your money to grow without removing your access to that money for an extended period of time. As an added benefit, you can continue to roll your MYGA into other products, such as other MYGAs, at the end of the term, providing you increased flexibility.
It is difficult to know what your financial situation will look like five or even ten years from now. Committing to a MYGA for this entire duration may not be the right fit for your situation.
Choose the Right MYGA Product for Your Needs
The right MYGA for each person is highly dependent on their situation, goals and tolerance to risk. Short-term MYGAs can be powerful tools in the right scenarios making it important to understand your needs and consider all of the options.
Pillar Life Insurance offers an online portal where clients can make the right annuity decisions for themselves without the hassle of speaking to an agent. Review the various options to select the MYGA that best fits your situation.