When people consider retirement planning, and how to keep receiving a “paycheck” after they leave their job, many consider one particular annuity known as a MYGA (Multi-Year Guaranteed Annuity). However, from an investment perspective, MYGAs can accomplish several other goals for most portfolios if used strategically.
Here’s why this is happening and what you need to know in order to capitalize on this product.
What MYGAs Accomplish in a Portfolio
A multi-year guaranteed annuity has long been considered to be an alternative to CDs as a means of growing money prior to retirement. There is no one portfolio formula for everyone.
You may choose to have one or more each of MGYAs, CDs, bonds, and cash as a certain percentage of your portfolio. By viewing a MYGA as another instrument to help you achieve your goals, you can set yourself up for success by incorporating stable products that are not based on the stock market.
How you do this will depend on your unique strategy and goals. In general, the reasons why investors are choosing MYGAs in lieu of other products for their portfolios include:
Historical High MYGA Annuity Rates
In the past, it was considered to be a smart move to invest in bonds and CDs as stable forms of growth because their rates were highly competitive, and annuities trailed behind. However, yields on U.S. Treasury securities tend to be lower than annuity rates, making MYGAs more favorable overall in terms of growth potential. In addition to these rate changes, MYGAs can offer some tax advantages that other products cannot.
For example, you will need to pay taxes each year on the growth earned in a CD. On the other hand, MYGAs do not require tax payment until they mature which means that your accumulated balance will continue to compound.
Achieving Laddering for Early Retirement or Other Needs
One of the biggest challenges that people face in retirement, and especially if they choose to retire early, is how to withdraw the cash they need before some of their later benefits start to pay out, including Social Security. For those who need consistent income for a set period of years to bridge a gap, laddering is a worthwhile method to consider.
Laddering is when you plan for certain accounts to pay out, one after another, in a pattern. In the case of MYGAs, you can select the maturity date for the annuity when you pick it.
If, for example, you were to choose five separate MYGAs that mature (and are then converted into an annuity that provides you with payments) at a rate of one per year, you can “activate” the next MYGA just as the previous one is running out. This provides a financial cover for a few years until you are able to withdraw without penalty from other accounts.
If you are not satisfied with the current rate your bonds are earning, it can be wasteful to keep a significant portion of your portfolio stuck in them. However, you may not be willing to commit that money to the fickle nature of the stock market, in which case, a MYGA can be an option to consider.
MYGAs allow you to withdraw your money from your bond allocations at low rates and stash it in a secure growth location without risking it to the temperament of the market.
One of the most favored advantages of a MYGA is that its accumulation is not driven by the market. That’s the “guaranteed” part of the multi-year guaranteed annuity; you know how much the amount will grow. For many investors, this reliability is a big part of what makes MYGAs appealing.
Those suffering from volatile bond rates will appreciate that MYGAs can provide a safe place to harbor money away from market downturns without compromising its ability to accumulate. Stability in some portion of any overall portfolio protects against shifts in the market and is critical for protection prior to retirement.
Choose the Right Annuity Products for Your Portfolio
While there are many products that may be a great fit for your portfolio, MYGAs are often overlooked in the face of CDs and bonds. However, with the right strategy, having one or more MYGAs can help you achieve your retirement goals.