Annuities as a Fixed Income Vehicle

[Z3Dreamer]

I looked at the various fixed income threads and didn't see anything on annuities. Forgive me, if I have sinned.

A Fido fixed income rep suggested that I look at Single Premium Deferred Annuities. I asked if he was talking about MYGA's. He doesn't use the term MYGA, but basically you pay some money and at the end of the term you get your principal plus a guarantied interest. You can choose term and other things. The rates are around 5% for 3 to 5 years. I have already purchased a big ol US agency bond so it isn't for me but I want to learn.

My question is: What is the appeal of a 5% annuity when you can get 6% or close to it from many other sources? The only thing I can think of is that you pay taxes on the annuity in the year it matures, whereas other investments are taxed each year. Any other reasons?

Please note that I am not looking for general annuity info as I have studied them for over 30 years.

PS Thank you for those who educated me on agency bonds as I purchased a big ol bond on Monday.

 

[Car-Guy]

My question is: What is the appeal of a 5% annuity when you can get 6% or close to it from many other sources? The only thing I can think of is that you pay taxes on the annuity in the year it matures, whereas other investments are taxed each year. Any other reasons?

If you are "investing" in an IRA or 401k you don't pay taxes until it's withdrawn. That could be years or even decades. I'm not a big fan of annuities but I can see why they might have a place for some folks.

 

[Z3Dreamer]

If you are "investing" in an IRA or 401k you don't pay taxes until it's withdrawn. That could be years or even decades. I'm not a big fan of annuities but I can see why they might have a place for some folks.

Thanks for your reply. I should have clarified that this is NOT IRA/401k money. It is fully taxable.

 

[Ready-4-ER-at-14]

Back when cd's and treasuries were at the low and I didn't want as much in stock we parked a fairly large amount of roth money into an annuity that was somehow roth capable. It was a 3 year term, or at least that was what i understood as well as my spouse who is licensed in insurance. Turn out it was it was a much longer term but had a withdrawal at no cost at the term i wanted. Took a bit of paperwork to get it out needed to time it right and would not repeat the experience. However, i think i got triple what cds and bonds were paying for 3 years.. but 3x almost nothing is still not much. Plus had i gone short term say 1 year i probably would have made more in cds.

So as to why someone would do an annuity when other sources were higher no idea unless there was a death benefit and you were terminal and using it as estate planning transfer to heirs perhaps?

 

[COcheesehead]

There are better returns and better liquidity elsewhere.

 

[PatrickA5]

No reason to consider one at the moment, but there have been times (recently) where MYGAs were paying more than CDs, MMs, Etc. And, as you mentioned you get to defer the interest. You just have to be very certain that you won't need the money during the term or you'll get hit with severe surrender penalties.

I had one back in 2020 at 2.5% when everything else was paying near zero.

 

[Koolau]

If you think interest rates on those other options will drop, you can possibly lock in that 5% or whatever for a longer period of time.


USUALLY, those MYGA rates are a bit higher than, for instance, CDs. If they are not, you might look elsewhere for a MYGA.

 

[Z3Dreamer]

Thanks for the thoughtful replies. Reasons for MYGA may be:

1. Estate tool of some sort
2. In the recent past (low interest times), MYGAs were higher than CD's, etc.
3. They are not callable so you could lock in a higher rate, now.

 

[pb4uski]

Thanks for your reply. I should have clarified that this is NOT IRA/401k money. It is fully taxable.

Some people might want the deferral in a taxable account to keep their income low for ACA subsidies or college expenses.

 

[capjak]

I have some MYGAs, there is a large thread on bogleheads supporting them.

They are commodities so search several websites, fidelity typically only sells A++ and they will have lower % rates than those rated lower.

Try Stan the annuity man or immediate annuities or blueprint income

Currently A rated 5 year at 5.45% with free annual withdrawal of 5% of premium if wanted, some have 10% free annual withdrawal as well.

 

[jazz4cash]

Yes. I see posters stretching for yield but refuse to even consider a MYGA. The people pushing high commission products inappropriately have tainted all annuity products. There are pros and cons of course, but MYGAs have been 70-80 bps higher for 5yr contract compared to CDs. CDs have narrowed that spread recently but it’s harder to get call protection. MYGAs no-call feature and 10% free withdrawal compare favorably to CDs.