A multi-year guaranteed annuity (MYGA) provides pre-retirees with straightforward, investable assets that can safely grow without relying on a lot of investment knowledge and risk. However, many people nearing retirement wonder how a MYGA works and whether it’s the right retirement product for their situation, especially if they don’t have a lot of time left to let their value grow.
This article explains how MYGAs work and the situations where this type of annuity can help lock in safe income, even with only a few years left before retirement.
How Predictable Accumulation Works
A MYGA is a fixed annuity with a set interest rate for the term of the contract, which is usually 3, 5, or 7 years. This fixed rate supports steady year-over-year growth, allowing the pre-retiree to accurately predict the value of their account by the time they’re ready to withdraw.
While no annuity is 100% predictable, this increased security helps reduce sequence-of-returns concerns as pre-retirees transition to retirement. Since there isn’t a decline in value due to market conditions (other than inflation), retirees won’t have to “time the market” to make the most of their investment, as they may have to do with market-dependent retirement funds.
Turning Accumulation Into Income
To turn a MYGA’s accumulation into retirement income, there will be several options at or near the annuity’s maturity. These include renewing the MYGA for another term at the insurance company’s latest rate, transferring the annuity to a different product or term, beginning systematic withdrawals as scheduled income, or annuitizing as a series of payments.
Simply put, the process of funding, accumulating, and withdrawing from a MYGA can be broken into three phases:
- The MYGA is funded with a portion of the pre-retiree’s savings
- The funds accumulate value for the term of the annuity (usually 3-7 years)
- At maturity, an income strategy is selected that aligns with the retiree’s expenses
A MYGA alone cannot usually fund a stable retirement, but it can be a beneficial supplement in a comprehensive retirement plan that includes Social Security and other income sources.
Laddering To Manage Timing Risk
“Laddering” is a term that means staggering multiple MYGAs with different term lengths to spread the risk of reinvestment. If interest rates go down as an annuity nears maturity, only one would risk a lower rollover rate to the next maturity period. The others would continue at their fixed rates, helping provide known milestones for a more predictable cashflow with a lower risk profile.
Who This Strategy Fits
Laddering multiple MYGAs might make the most sense for those who are risk-averse or simply prefer clarity, stability, and planning over variability. These individuals often earmark savings for retirement needs closer to the beginning of their withdrawals to achieve these benefits:
- Predictable accumulation for easier budgeting
- Simplicity compared with market-based tools
- Control and confidence with clear contract terms up front
- Ability to integrate the MYGA into a full plan
Tradeoffs To Understand
While these benefits can make MYGAs attractive, no retirement plan is without risk. The tradeoffs that should be acknowledged include any surrender charges and liquidity limits. These can trigger penalties if the funds are withdrawn early.
Additionally, if rates go down, the MYGA’s reinvestment value may be lower at renewal. Despite a fixed accumulation rate, inflation also poses a risk to the account’s value. And since the annuity is tied to the account of an insurer, that company’s financial strength is a risk factor out of the retiree’s control.
Choosing Terms, Carriers, & Features
To choose the right terms, carrier, and features of a MYGA, carefully review several aspects:
- Term length should be selected based on long-term goals, including retirement timeline, cash-flow needs, and long-term plans, including whether the MYGA will be rolled over, annuitized, or withdrawn.
- Careful carrier selection is important when opening the account to guarantee its value when it reaches maturity.
- Individual features of the annuity should be reviewed, including free-withdrawal provisions, RMD handling, market value adjustment, and beneficiary options.
Taxes & Account Types
MYGAs grow tax-deferred, which means that taxes are not paid on yearly growth. However, when the funds are withdrawn, the tax status of the withdrawal depends on the account type, which can be qualified or non-qualified.
- In a qualified account like an IRA or 401(k), the withdrawals are usually taxed as income.
- For non-qualified accounts, interest is taxed as income while the retiree’s initial investment or principal is returned tax-free.
Always consult a tax professional for guidance on the status of individual annuities and the features they have in your specific situation.
How Matador Builds Your MYGA-Backed Plan
Matador’s process for helping build a stable MYGA-backed retirement plan includes three essential steps:
- Discovery: We gather data on expenses, estimates, timelines, priorities, and liquidity needs to narrow down the right annuity account.
- Strategy: We map out where a MYGA fits in each situation, including selecting the right terms while considering laddering and coordinating with Social Security and other annuities.
- Annual Review: To make sure the account continues to match the goals, we conduct annual reviews to revisit life changes, evaluate maturity options, and adjust the plan accordingly.
Discover How a MYGA Supports Your Retirement Goals
At Matador Insurance, we go beyond products; we provide a personalized retirement strategy that grows with you. Our team translates complex financial details into a clear, step-by-step plan tailored to your timeline, expenses, and lifestyle. With ongoing reviews and a client-first approach, we’ll help you protect your assets, plan your legacy, and move confidently into retirement. Contact us today to start building your customized strategy.