Retirement can be a time of leisure and hobbies, but it can become stressful if you have to worry about finances. Preparing for retirement can be done in a variety of ways, from funding traditional investment vehicles to tucking money away in high-yield savings accounts and more.
Multi-year guaranteed annuities, or MYGAs, are just one of the many potential options you have if you are considering how to fund your retirement. However, before you opt for a MYGA, you need to understand the product. Here are the questions you should ask before you decide on a MYGA for your retirement situation.
How a MYGA Works
A MYGA, or multi-year guaranteed annuity, is a type of contract between a client and an insurance company. You, as the client, place a lump sum amount into the annuity and that amount will continue to grow over time according to the interest rate that you agreed to when you signed the contract. Most MYGAs will compound their interest yearly, and their growth is tax-deferred which means you will not pay taxes on it until you receive it as income.
Once the MYGA is converted into an immediate annuity, it will begin to pay out. In this sense, annuities in general work similarly to paychecks and some annuities also allow you to choose how often you get paid. The money in your annuity is guaranteed to last for the entire term that you select at the start of the contract. Some types of annuity can even be set up to last for the remainder of your entire life.
Questions You Should Ask Before Considering a MYGA
If you are considering a MYGA, there are some questions to consider before you sign on the dotted line. If you are not sure what to ask, consider:
Do I need the money soon?
Retirement comes with many ups and downs, some of which are highly unexpected, such as medical bills. If you need quick access to cash beyond what the MYGA provides in its regular payments, an annuity may not be the best choice for you. Getting money back out of a MYGA can be difficult at best, often with high fees attached, or simply not possible, depending on the terms.
Does a MYGA suit my risk tolerance?
MYGAs are best for people who are risk averse. This tends to be the position of those closer to retirement, when dips in the market could have a significant impact on one’s livelihood for the rest of their years. However, for people who are willing to tolerate a bit of risk for the potential of higher returns, MYGAs may not suit their needs.
This is a low risk type of investment because it does not track the market, instead, it simply sits and grows, albeit at a lower rate than a high-performing market, but without the up and down market swings.
What are my options when the MYGA guarantee period ends?
Most rate guarantees will go for a term of two to ten years. Once the guarantee period ends, you can take the money and put it into another MYGA, into a SPIA, or you can accept it as a lump sum.
How do taxes work?
MYGAs work on a tax deferred basis. This means that any growth occurring within the annuity itself will not be taxed until you see that money as income. This helps the MYGA grow as much as possible, but those considering a MYGA need to be prepared to pay taxes at some point.
Do I need a death benefit?
Not all annuities come with a death benefit; while the MYGA is accumulating, any money within it will return to the beneficiaries if the primary person passes away. However, this arrangement can change once the MYGA is converted into an immediate annuity. These and other types of annuities may be eligible for the inclusion of a death benefit.
If it is important to you that a beneficiary, such as a spouse or child, receive what is left of your MYGA, be sure to clarify whether your potential MYGA and immediate annuity offer the ability to add a death benefit and what the related process entails.
Choose the Right Annuity for You with Pillar Life Insurance
MYGAs can be a powerful tool to fund retirement, but they are not right for all situations. If you have decided that a MYGA suits your needs, or if you want to consider other options, take that power into your own hands. Pillar Life Insurance offers a self-service online portal that allows you to make the best decisions for your family without the need to work with a consultant. Fill out your information online to get started.