Multi-year Guaranteed Annuity

[Gunny]

I recently discovered an A-rated company offering a 5.45% annual rate for a ten year annuity with the option of taking up to 10% out without penalty. At the end of the term one can roll over into a new annuity, an IRA, or cash out. With most of the big financial players (Vanguard, JP Morgan, Morningstar) forecasting a ten year average return of around 5% for the S&P, it looks to me like a guaranteed 5.45/yr for ten years with no market volatility is a smart move for the bulk of my portfolio. Thoughts?

 

[Sunset]

I wouldn't want to put the bulk of a portfolio in 1 thing/company.

Unless it's in a tax sheltered account now, won't you get a big tax hit cashing out to buy it ?

 

[Chuckanut]

I recently discovered an A-rated company offering a 5.45% annual rate for a ten year annuity with the option of taking up to 10% out without penalty. At the end of the term one can roll over into a new annuity, an IRA, or cash out. With most of the big financial players (Vanguard, JP Morgan, Morningstar) forecasting a ten year average return of around 5% for the S&P, it looks to me like a guaranteed 5.45/yr for ten years with no market volatility is a smart move for the bulk of my portfolio. Thoughts?

Have you read the contract? Before I put the 'bulk of my portfolio' into anything I would make certain to read and understand the entire contract.

This is important because the contract almost certainly contains a clause that says if the sales person, advertisement, brochure or whatever says something different from the contract, you both agree that the contract terms are what counts.

Note: I would never put a majority of my portfolio into one financial asset. IMO, diversification is a key component to the financial chapter of a good retirement.

 

[PatrickA5]

I would only consider it if I knew I wouldn't need the money for ten years. That's a long time.

Having said that, DW and I bought a couple of MYGA's from Fidelity (Mass Mutual) a few years ago and have been pleased. It's coming due in May and we'll decide then whether to renew it or not. So, I'm not against the product but not sure I'd want to tie up my money for a decade. I might not even be around that long LOL.

 

[MarieIG]

I recently discovered an A-rated company offering a 5.45% annual rate for a ten year annuity with the option of taking up to 10% out without penalty. At the end of the term one can roll over into a new annuity, an IRA, or cash out. With most of the big financial players (Vanguard, JP Morgan, Morningstar) forecasting a ten year average return of around 5% for the S&P, it looks to me like a guaranteed 5.45/yr for ten years with no market volatility is a smart move for the bulk of my portfolio. Thoughts?

Are the funds already in an IRA or 401k?

My thoughts - that sounds like too much of a risk for the "bulk" of your portfolio. I would suggest keeping sufficient funds easily accessible for lumpy expenditures and emergencies and being cognizant of your state guarantee level.

 

[Gunny]

The amount I would use for the MYGA doesn't represent the entirety of my portfolio, although it would be about 70 percent. I have other funds to tap for unexpected expenditures plus I have a nice pension. The terms I site in my OP are from the company's brochure, not a salesman. The most attractive thing about the annuity is that it is safe from market swings and will also serves as my life insurance for my wife in case I pass early because it passes to named beneficiary. The same company also has a five year term which pays 5.7%

 

[sarasotacycler]

You should consider making MYGAs a portion of your portfolio. I have done this recently but wouldn't put all of my investment in them. MYGAs have failure risk and while most are insured up to $250k, the insurance is from state associations - not the same safety as FDIC for CDs. I would recommend searching this site and the Bogleheads site for the term MYGA. There is a lot of information out there with varying opinions. As with everything you will need to assess what will work for you. I have seen some recommend not more than 10% of your portfolio in MYGAs. Withdrawal options could allow for a larger investment but you must assess credit risk and possibility of penalty withdrawals. You might mix in other fixed income investments such as corporate bonds, treasuries and CDs. All of these are now ranging between 4% and 6% APY.

 

[sarasotacycler]

One more thing to consider is the tax impact of taking 10 years of interest at the end of the term. MYGAs are tax deferred but accrued interest hitting all at once to income can add to mandatory IRA (72T) withdrawals possibly exacerbating what is called a "tax time-bomb". You can plan around this with annual withdrawals but need to figure out how it will impact you.

 

[ShokWaveRider]

I would not go for over 5 years with any company below A++. JMHO. I do have an A rated with 4 years left to go on a 5 year.

 

[copyright1997reloaded]

The amount I would use for the MYGA doesn't represent the entirety of my portfolio, although it would be about 70 percent. I have other funds to tap for unexpected expenditures plus I have a nice pension. The terms I site in my OP are from the company's brochure, not a salesman. The most attractive thing about the annuity is that it is safe from market swings and will also serves as my life insurance for my wife in case I pass early because it passes to named beneficiary. The same company also has a five year term which pays 5.7%

There is no way I would make ANY single-issuer investment 70% of my portfolio, even with a "nice pension". But that's just me. I wouldn't even put 70% of my portfolio into US Government guaranteed FIXED income investments. Even if the world would go crazy and I could get 4% real on US Government TIPS, and I decided to "go wild" on them, I doubt I would go as high as 70%.

 

[Sojourner]

With most of the big financial players (Vanguard, JP Morgan, Morningstar) forecasting a ten year average return of around 5% for the S&P...

Ten year forecasts for the S&P 500 are about as reliable as ten year weather forecasts, no matter how big or well-known the forecaster is. I would take such prognostications with a huge grain of salt, or (even better) ignore them completely. The S&P 500 has produced average annual returns of better than 11% going back nearly 60 years. Stay invested, stay diversified, and try not to react to the hyperbole of market analysts, strategists, and soothsayers.

 

[Gunny]

I would fund the MYGA from a tax deferred retirement account, so I could roll the annuity into an IRA on maturity. The taxes then would only be paid on annual distributions.

 

[Gunny]

Great input so far. That's why I posted the question. Thanks.

 

[MichaelB]

Uninformed annuity person here. Is the annuity annual rate the same thing as the rate of a bond?

 

[Gunny]

Uninformed annuity person here. Is the annuity annual rate the same thing as the rate of a bond?

Good question. I'm not sure the answer to that. What I understand is that once locked in it's the annual rate paid for the life of the annuity.

 

[pletal]

I recently discovered an A-rated company offering a 5.45% annual rate for a ten year annuity with the option of taking up to 10% out without penalty. At the end of the term one can roll over into a new annuity, an IRA, or cash out. With most of the big financial players (Vanguard, JP Morgan, Morningstar) forecasting a ten year average return of around 5% for the S&P, it looks to me like a guaranteed 5.45/yr for ten years with no market volatility is a smart move for the bulk of my portfolio. Thoughts?

I have about 15% of my portfolio (about 1.25M) in MYGA products right now going from 5-10 years. 5 different companies. Looking at a 5.25 5 or 7 year A+ rated company right now. Look at your state insurance coverage limits. I like the tax deferred aspect and the 10% withdrawal if needed. Trying to keep taxable income lower right now because of IRMAA Brackets. Have most of my money tied up in CD'ds / Individual tax free muni's. I based my retirement (when I finally have the guts!) on a 3% return. I think you can roll over even part of an MYGA when it comes due.

 

[pb4uski]

I recently discovered an A-rated company offering a 5.45% annual rate for a ten year annuity with the option of taking up to 10% out without penalty. At the end of the term one can roll over into a new annuity, an IRA, or cash out. With most of the big financial players (Vanguard, JP Morgan, Morningstar) forecasting a ten year average return of around 5% for the S&P, it looks to me like a guaranteed 5.45/yr for ten years with no market volatility is a smart move for the bulk of my portfolio. Thoughts?

The issue that I have with these is that other then the 10% annual withdrawal allowance, your money is tied up and inaccessible without significant surrender fees.

Vanguard is showing a new issue Federal Farm Credit Bank maturing in 2028 yielding 5.54%. Or a couple 5 year Federal Home Loan Bank new issues that are 5.6% and 5.3%. Sure, they are callable so there is call risk but if you ever need those funds you can sell them with a few clicks. You might get less than what you paid if interest rates have risen since issue, but it will be less than the surrender penalty on a MYGA.

 

[pb4uski]

Uninformed annuity person here. Is the annuity annual rate the same thing as the rate of a bond?

Yes, the MYGA interest rate (5.45% in the case of the OP) is analagous to the coupon rate on a new issue bond or the yield-to-worst on a bond.

 

[jazz4cash]

I am a big fan of MYGAs but 70% is too concentrated. I’m getting a similar rate on a 6 yr contract so I highly recommend laddering maturities to diversify risk. I would not exceed the State Guaranty Association coverage limits. Buying a MYGA is more like buying insurance than any other other financial product. The contract is >60 pages for the two I have. You probably wont see it until you fund the MYGA but you can back out within (30?) days if you change your mind. I’ve tried to read it but unless you are trained to understand it’s way more complicated than the product itself. There are great resources at Stan The Annuity Man, immediateannuities.com, and Blueprint income.

 

[skyking1]

We have about 16% in one that will start paying out in 22 months. It will bridge to my age 70 SS.
They have a place but I agree that putting 70% in any ONE thing is not a good plan.

 

[rmorris50]

I would fund the MYGA from a tax deferred retirement account, so I could roll the annuity into an IRA on maturity. The taxes then would only be paid on annual distributions.

So would the MYGA sit inside an IRA? I always found that weird, since both are tax deferred.

 

[jazz4cash]

It’s only weird when a sales person touts tax deferral as a feature. The feature in this case is a high fixed rate.