Any reason not to do a MYGA?

[Diogenes]

Neophyte question: why are these called "annuities"?

To me, an "annuity" is where I surrender $X in capital, in exchange for a perpetual monthly payment of $Y. If I die next Tuesday, then the monthly payment dies with me. If I live to 110, the annuity-writer loses his or her shirt, because I will have received many many times $Y... and that's likely more than the escalated value of $X, assuming some CAGR (the S&P 500?) and inflation and so on.

But this MYGA sounds like an enhanced version of a CD, with some quirks/penalties. Did I understand that correctly? If so, why is it called... an "annuity"?

 

[RetiredHappy]

Neophyte question: why are these called "annuities"?

To me, an "annuity" is where I surrender $X in capital, in exchange for a perpetual monthly payment of $Y. If I die next Tuesday, then the monthly payment dies with me. If I live to 110, the annuity-writer loses his or her shirt, because I will have received many many times $Y... and that's likely more than the escalated value of $X, assuming some CAGR (the S&P 500?) and inflation and so on.

But this MYGA sounds like an enhanced version of a CD, with some quirks/penalties. Did I understand that correctly? If so, why is it called... an "annuity"?

What you are describing is called single life annuity.

MYGA is a form of fixed period deferred annuity. I have 2 fixed periods deferred fixed income annuities, one that guarantees to pay for 10 years while the other 15 years. If I die, my beneficiaries get the rest of the periodic payouts. They are also different from MYGAs.

 

[Diogenes]

What you are describing is called single life annuity.

MYGA is a form of fixed period deferred annuity. I have 2 fixed periods deferred fixed income annuities, one that guarantees to pay for 10 years while the other 15 years. If I die, my beneficiaries get the rest of the periodic payouts. They are also different from MYGAs.

Right, but where is the "annuity" portion? One buys a MYGA, holds it for n-number of years, and then receives the cash value, whatever that is, determined from the compounded rate of return. Yes? Did I get that correctly? Where it the "annual" part?

 

[Al18]

MYGA are typically for 3-10 years. You are guaranteed to get all the principal plus all the interest at maturity (or your beneficiary will). You can typically withdraw up to 10% per year without penalty.

If you buy a SPIA the day you turned 68 you will get a preset amount per year for the rest of your life. There is a chart you’ll receive with this type of annuity, stating if you’ll receive a partial refund if you pass away early (usually about age 80).

There are lots of options when choosing an annuity. There’s a lot of video’s by Stan the Annuity Man if you want to learn more.

 

[GenXguy]

But this MYGA sounds like an enhanced version of a CD, with some quirks/penalties. Did I understand that correctly? If so, why is it called... an "annuity"?

Very different from a CD. During the guarantee period, say 6 years or whatever, if you don't take any distributions, you don't realize any income. That was my reason for putting some of my CD money into MYGA's. I needed less income while on the ACA. On the other hand, if someone needed to withdraw any money early, it would be interest first. But I won't be doing that.

 

[Diogenes]

Very different from a CD. During the guarantee period, say 6 years or whatever, if you don't take any distributions, you don't realize any income. That was my reason for putting some of my CD money into MYGA's. I needed less income while on the ACA. On the other hand, if someone needed to withdraw any money early, it would be interest first. But I won't be doing that.

Understood, but suppose that a person didn't need any income whatsoever. I mean, zero withdrawals. Zero! However, our hero wants to diversify from stocks, because he read on the internet that a 100% equity allocation is bad. And he or she doesn't want to dabble in bonds (see the most recent dozen threads on the subject). Should our hero get into these MYGAs? And just treat them as money-locked-away-for-n-years, instead of annuities?

 

[RetiredHappy]

Understood, but suppose that a person didn't need any income whatsoever. I mean, zero withdrawals. Zero! However, our hero wants to diversify from stocks, because he read on the internet that a 100% equity allocation is bad. And he or she doesn't want to dabble in bonds (see the most recent dozen threads on the subject). Should our hero get into these MYGAs? And just treat them as money-locked-away-for-n-years, instead of annuities?

Yes, to get guaranteed interest. You can treat it like a CD except with a couple of percentage higher in interest. We have mid 6 figures in MYGAs. You do want to buy them with AM Best A rated and higher insurance companies.

 

[Al18]

interest can be deferred until you fully or partially cash in the MYGA. After the MYGA matures, you can typically extend it with the same company or do a 1035 exchange it for a MYGA with another company.

 

[susswein]

What good is a 4.75% return when inflation is currently 3.8% and expected to rise? By the time the MYGA matures you'll see a negative post inflation rate of return.

 

[Al18]

How can you possibly know what the inflation rate is in 5-10 years?

 

[RetiredHappy]

What good is a 4.75% return when inflation is currently 3.8% and expected to rise? By the time the MYGA matures you'll see a negative post inflation rate of return.

The same argument can be said about bonds. Pick your poison.

At a glance, A++ is currently paying 5.3%.

 

[Al18]

Guaranteed fixed income is the cornerstone of many folks lifetime of savings and retirement - no regrets.

 

[pb4uski]

Neophyte question: why are these called "annuities"?

To me, an "annuity" is where I surrender $X in capital, in exchange for a perpetual monthly payment of $Y. If I die next Tuesday, then the monthly payment dies with me. If I live to 110, the annuity-writer loses his or her shirt, because I will have received many many times $Y... and that's likely more than the escalated value of $X, assuming some CAGR (the S&P 500?) and inflation and so on.

But this MYGA sounds like an enhanced version of a CD, with some quirks/penalties. Did I understand that correctly? If so, why is it called... an "annuity"?

You understand the product perfectly... it is effectively a CD issued by an insurance company.with a more expensive early withdrawal penalty mechanism.

It is called an annuity because all of these contracts have an annuitization option where rather than getting back your principal and interest you can opt to receive stated benefits for life (like using the proceeds to buy a SPIA) or over a stated time period (like using the proceeds to buy a period annuity). This annuitization option make it an annuity in the eyes of the IRS and defers taxes on the inside buildup of interest.

If the contract didn't contain an annuization option then it would be taxed as interest is credited to the account like a CD.

 

[VanWinkle]

We have been looking at different scenarios for unwinding 3 MYGAs due to start maturing each year starting in January 2027. The comparison of 10 year income annuities through 1035 exchange is compared with taking the cash at maturity and investing at a 6% return over 10 years.

 

[sdawson]

What good is a 4.75% return when inflation is currently 3.8% and expected to rise? By the time the MYGA matures you'll see a negative post inflation rate of return.

In my case, MYGA are part of my rolling short term bucket in retirement, composed of CD's for first two years and MYGA for years three and four.

If (when?) the market collapses, these funds can provide income rather than selling equities in a down market. If the market is up during the year, then I can sell equities to fund my next year, and roll over that years maturing CD/MYGA to another four year MYGA.

 

[ShokWaveRider]

MYGAs for us are CD equivalents. We have 1 BBB (B++) with Canvas Annuities. I keep it at the state guarantee fund max just in case the sh!t hits the fan. The rest are A and above. I withdraw everything over that in December and have it withheld to pay the current years taxes eliminating the need for monthly payments and other withholdings. OMMV.

 

[jazz4cash]

Right, but where is the "annuity" portion? One buys a MYGA, holds it for n-number of years, and then receives the cash value, whatever that is, determined from the compounded rate of return. Yes? Did I get that correctly? Where it the "annual" part?

The"annuity" portion is in the fine print. It is the insurance company version of a CD but it has the thin veneer of an annuity to make it legit. We talk about 3,4,5, even ten year MYGA's but that term is the Guaranty Period. The contract runs 30 yrs but the rate is peanuts after the Guaranty Period expires. There is an option to choose a series of lifetime payments also.

 

[Bruno]

Understood, but suppose that a person didn't need any income whatsoever. I mean, zero withdrawals. Zero! However, our hero wants to diversify from stocks, because he read on the internet that a 100% equity allocation is bad. And he or she doesn't want to dabble in bonds (see the most recent dozen threads on the subject). Should our hero get into these MYGAs? And just treat them as money-locked-away-for-n-years, instead of annuities?

If you don't need the money MYGA are better to me than a CD!! My LAST MYGA was bought in my IRA. I can live with the higher interest rate than a cd or bond. My only problem was I had 1 MYGA in brokerage account that I renew and over that 10 year period the interest total was $76K. OUCH I should have been doing the free 10% withdrawals but I didn't want to add to my income. To correct that my last $250k MYGA was bought in my IRA.

 

[RetiredHappy]

Currently an AM Best A++ rated company is paying 5.3% for 10 years, 5.2% for 7 years, and A+ rated company is paying 5.35% for 5 years. Based on AM Best, there is 0 failure rate for A++ companies.

 

[hotwired]

Wrong. You don't know what you are talking about.

MYGAs are the insurance company version of CDs so the insurance company doesn't get to keep the money if you die. Even with life annuities, they have versions with guaranteed return of premium or 10 years of payments to mitigate the risk of dying early.

The reason that they can offer better rates than CDs or Treasuries is because they profit off the spread between what they pay you and the corporate bonds and other higher yielding fixed income securities that they invest in.

After regulatory reforms enacted in the wake of the Executive Life and Mutual Benefit Life insolvencies in the late 1980s insolvencies have been rare.

Please stop giving bad advice.

Another way to describe it (not necessarily correct but a decent metaphor) is that they're cutting you in on a piece of their bond ladder. They're basically saying "I can give a curiously safe 5 percent for (example) 7 years but you can't touch it for 7 years, except t for interest, or we'll ding the **** out of you for disturbing our plan.

 

[hotwired]

We use Stan the annuiity man... profoundly cheesy name, torture to listen to his videos but he's the real deal. He's just a broker, and guns ranges from A++ to B++. Did our first 1035 exchange from my wife's 30 year old variable John Hancock annuiity to an SPIA with Guardian Life (same rating as NY life)

 

[RetiredHappy]

Another way to describe it (not necessarily correct but a decent metaphor) is that they're cutting you in on a piece of their bond ladder. They're basically saying "I can give a curiously safe 5 percent for (example) 7 years but you can't touch it for 7 years, except t for interest, or we'll ding the **** out of you for disturbing our plan.

Most MYGAs allow 10 percent withdrawal every year, not just the interest.

 

[CautaServans]

I signed the paperwork for my first MYGA through Schwab yesterday! I never considered it in the past because I did not know about it, and this discussion has helped me a lot. Looking at CD rates standing still or dropping and my tax-deferred accounts swinging wildly, I think having a five-year MYGA at 5.1% is just the peace-of-mind purchase I needed. I likely will get one more in September when another jumbo CD matures.

How many of you keep rolling them into new ones? I'm wondering if I will even need it by the end of the five-year term.

 

[jazz4cash]

I signed the paperwork for my first MYGA through Schwab yesterday! I never considered it in the past because I did not know about it, and this discussion has helped me a lot. Looking at CD rates standing still or dropping and my tax-deferred accounts swinging wildly, I think having a five-year MYGA at 5.1% is just the peace-of-mind purchase I needed. I likely will get one more in September when another jumbo CD matures.

How many of you keep rolling them into new ones? I'm wondering if I will even need it by the end of the five-year term.

Welcome to MYGA world. Turns out not all annuities are terrible after all. Who is the issuer and what terms did you get if you don't mind sharing?

 

[sdawson]

I signed the paperwork for my first MYGA through Schwab yesterday! . I likely will get one more in September when another jumbo CD matures.

How many of you keep rolling them into new ones? I'm wondering if I will even need it by the end of the five-year term.

Congratulations, I too added my first MYGA to my short term bucket this spring. I have set aside moneys for the next 4 years, which included Money Market for first year (0), then CD's for years 1 and 2, then MYGA for year 3.

3 year was the shortest term MYGA and fit what I needed. If my retirement accounts do well when the first CD matures then I'll draw from the retirement accounts and roll that CD over into a MYGA.

I am considering pushing this to five year MYGAs, and keep a rolling bucket of 5 year expenses, but had to dip my toes in the MYGA waters somewhere to get a feel for them.

It was quite different thand purchasing a CD, with contracts and signatures, and new account (at New York Life for my MYGA), but seems to have gone well. I have done this within an IRA, and the MYGA balance shows up in the IRA viewing it through Fidelity. I can log in directly to New York Life as well, but it is good that Fidelity has the view wired in.