Which is Better for You?
As interest rates continue to hover at all-time lows, these tiny returns aren’t the worst thing that could happen to investors who are holding bonds. That’s because if interest rates rise in the future (which they are likely to do), the value of individual bonds will fall, in turn, making these investments even less valuable to investors.
The longer the bond’s maturity, the more the investor stands to lose if (or better yet, when) interest rates go up. So, in addition to paying out low rates of interest, bondholders can also stand to lose a portion of their principal – especially if they cash out early.
But there is a possible alternative to bonds – and that is the Multi-Year Guaranteed Annuity.
What are Multi-Year Guaranteed Annuities and How Do They Work?
Multi-year Guaranteed Annuities (MYGAs) are a type of fixed annuity that provide a set interest rate for a certain period of time (typically anywhere from three to ten years). Once the rate guarantee period has elapsed, the annuity owner will usually have the option to re-invest for another pre-determined period of time (at a new rate of interest).
In lieu of reinvesting, the annuity holder could instead convert the annuity to an income stream, or to withdraw all of the money from the account penalty-free. And unlike bonds, the annuity holder doesn’t have to worry about loss of principal.
As with other types of annuities, the growth that takes place inside of the MYGA account is tax-deferred, so there is no tax due on the gain until the time of withdrawal. Note that the interest on most bonds is taxable when it is received.
Yet another key feature to consider with a Multi-Year Guaranteed Annuity is the guaranteed stream of income that can be received. Being a fixed annuity, the MYGA will pay out a stated amount of income for a set period of time – such as ten or twenty years – or for the remainder of the annuitant’s (i.e. the income recipient’s) lifetime, regardless of how long that may be.
Bonds versus Multi-Year Guaranteed Annuities (MYGAs)
|Bonds||Multi-Year Guaranteed Annuities (MYGAs)|
|Potential loss of principal||Yes||No|
|Early withdrawal penalty||Yes||Yes|
|Guaranteed income for life||No||Yes|
Items to Consider Before Buying a MYGA Annuity
While MYGA annuities can certainly provide you with a nice list of benefits, there are some items that you should consider before you make a commitment to purchasing one. These include the following:
- Interest rate
- Guarantee period
- Surrender/early withdrawal penalty (note that in some cases, if funds are reinvested in an MYGA annuity, the surrender period will start over, too)
- Future income needs
- Other retirement income sources
- Insurance carrier/ratings
Is a Multi-Year Guaranteed Annuity Right for You?
Even though Multi-Year Guaranteed Annuities can provide some nice advantages over bonds, these financial vehicles are not right for everyone. With that in mind, it can help to discuss your objectives, as well as your risk tolerance and time horizon, with an annuity specialist. That’s where Annuity Gator comes in.
At Annuity Gator, our mission is to make sure that investors, retirees, and financial professionals have a good understanding of annuities and how they work – as well as a way to determine whether or not an annuity is right for their particular needs.
If you still have questions about Multi-Year Guaranteed Annuities, or if you would like to compare various annuity options to determine which – if any – is right for your needs, please feel free to contact us directly by phone at (888) 440-2468, or via email by going to our secure online contact form. We look forward to assisting you.