What is a multi-year guaranteed annuity (MYGA) & how does it work?

When you are looking for investment solutions that offer stability and security—especially in an uncertain market—your options aren't just limited to CDs and high-yield savings accounts in retirement.

You may want to consider a multi-year guaranteed annuity (MYGA). It’s a fixed-deferred annuity that allows you to take advantage of a high interest rate environment with locked-in interest rates that are not impacted by market performance.

A multi-year guaranteed annuity is a fixed deferred annuity designed to avoid market volatility, offer tax-deferred growth, and provide a guaranteed income stream in retirement. MYGAs provide a locked-in, guaranteed rate of return for as long as the selected guaranteed period lasts, typically between three and nine years.

You purchase a multi-year guaranteed annuity through a contract with an insurance company. When you purchase a MYGA, you can choose a single premium amount that best fits your financial needs and goals. Minimum and maximum premium amounts vary by company.

The company you purchase your multi-year guaranteed annuity through agrees to pay you a fixed interest rate on your premium amount for your selected period. You'll get interest credited regularly, and at the end of the term, you either can renew your annuity at an updated rate, leave the money at a fixed account rate, elect a settlement option, or withdraw your funds.

ADVANTAGES: You purchase a multi-year guaranteed annuity through a contract with an insurance company. When you purchase a MYGA, you can choose a single premium amount that best fits your financial needs and goals. Minimum and maximum premium amounts vary by company.

The company you purchase your multi-year guaranteed annuity through agrees to pay you a fixed interest rate on your premium amount for your selected time period. You'll get interest credited regularly, and at the end of the term, you either can renew your annuity at an updated rate, leave the money at a fixed account rate, elect a settlement option, or withdraw your funds.

Risks: risks of multi-year guaranteed annuities?

• Limited liquidity. Annuities typically have penalties for early withdrawal or surrender, which can limit your ability to access your money without charges.

• Lower returns than other investments. MYGAs may have lower returns than stocks or mutual funds, which could have higher returns over the long term.

• Fees and expenses. Annuities usually have surrender charges and administrative costs. In addition, some MYGAs have a Market Value Adjustment (MVA). MVA is an adjustment—either positive or negative—to the accumulated value if you make a partial surrender above the free amount or fully surrender your contract during the surrender charge period.

• Inflation risk. Because MYGAs offer a fixed rate of return, they may not keep pace with inflation over time.

• Not insured by FDIC. Annuities are not federally insured like bank deposits and the guarantees are backed by the insurance company that you purchase your MYGA from. It’s important to vet the strength and stability of the company you choose. Look at reports from A.M. Best, Fitch, Moody's or Standard & Poor's.

MYGA vs. CD: What's the difference?

Unlike insurance products, Certificates of deposit (CDs) are banking products. But both offer multiple guaranteed fixed-rate options and are good options for guaranteed returns. However, there are some notable differences between the two:

• MYGAs generally offer a higher interest rate than CDs. While both offer guaranteed rates of return, MYGAs often offer a higher interest rate than CDs.

• MYGAs grow tax deferred while CDs are taxed as income annually. Annuities grow tax deferred, so you don’t owe income tax on the earnings until you withdraw them. This allows your earnings to compound over the term of your MYGA. In contrast, unless a CD is held in a retirement account (such as an IRA), the interest it earns is taxed annually. This reduces the potential for CDs to benefit from long-term compound interest.

• MYGAs are issued by insurance companies while CDs are issued by banks or credit unions.

• Both MYGAs and CDs typically have early withdrawal penalties that may impact short-term liquidity. With MYGAs, surrender charges may apply, depending on the type of MYGA you choose. So, you may not only lose interest, but also principal—the money you originally contributed to the MYGA. With CDs, interest rate penalties may apply for early withdrawals. This means you may lose interest but not the principal amount contributed to the CD.

Who should consider getting multi-year guaranteed annuities?

Their conservative nature often appeals more to people who are approaching or already in retirement. But they might not be right for everyone.

A multi-year guaranteed annuity may be right for you if you want to:

• Take advantage of a guaranteed rate and lock it in for some time.
• Enjoy protection from market loss.
• Benefit from tax-deferred earnings growth.
• Have the option to select a settlement option for a guaranteed stream of income that can last as long as you live.

As with any type of savings vehicle, it’s important to carefully review the terms and conditions of the product and consult with a financial advisor to determine if it's a wise choice for achieving your individual needs and goals.

Dr. Marcos Levy