As individuals approaching retirement begin planning their legacy, their choice of financial products becomes a significant decision. The goal of any retirement profile is to secure the right balance of financial predictability, growth, and tax advantages. For many years, bonds have been a primary choice for those looking for safe income in retirement, but financial uncertainty has led many to wonder if a multi-year guaranteed annuity (MYGA) would be a better fit.
This article compares MYGAs and bonds to help those preparing for retirement to better secure their legacy. Both account types provide benefits to security and stability while also presenting tradeoffs. Continue reading to learn more about how to secure your retirement for yourself and your family, using one strategy or a combination of retirement accounts to meet your goals.
MYGA Annuities Explained: Benefits and Your Goals
A MYGA is a contract with an insurance company for a fixed term, commonly 3, 5, 7, or 10 years. This type of annuity grows in value based on an interest rate, listed in the contract. Unlike financial products tied to market performance, MYGAs grow without fluctuating, providing predictability with a clear spending and budgeting plan for their retirement.
While this provides security for the account, insurance companies protect their interests by leveraging certain capital and withdrawal requirements. For example, MYGAs allow partial withdrawals before the term limit without a penalty, but above the percentage listed in the contract, may apply surrender charges to the account.
Another core benefit of MYGAs is their tax-deferred status, which can be advantageous in many situations, especially in higher income brackets. Tax-deferred growth means that the funds not already allocated to an IRA or 401(k) are not taxed until the funds are withdrawn. This is called a “non-qualified” account.
Not all MYGAs are non-qualified. Confirming account status with a financial advisor helps determine the growth style that aligns with your goals.
Bonds Explained: Structure, Risk, and Liquidity
Bonds function like loans to a financial institution or corporation, except the lender is the government or a financial institution that issues the bonds in exchange for returns on interest. For example, corporate and municipal bonds carry varying levels of risk depending on the lender while treasury bonds are secured by the U.S. government.
Unlike MYGAs, which issue returns based on a fixed contract, the value of bonds changes based on market conditions, and corporate bonds can default based on the company’s financial performance. This makes past financial stability a more significant factor in the choice of lender when buying a bond.
Like MYGAs, bond interest is taxable annually when held in a brokerage account and tax-deferred when held in an IRA or 401(k). However, unlike annuities, bonds are not classified as qualified or non-qualified. The type of bond and account determines its tax status.
Unlike MYGAs and other annuities, bonds provide more liquidity, which can be helpful in uncertain situations when cash may be needed at short notice. The bond balance can be bought or sold in most cases without surrender charges.
Ideal Situations for MYGAs vs Bonds
Both MYGAs and bonds provide overlapping benefits, and each can be a profitable part of a well-rounded retirement fund. However, they have slightly different risk profiles, which can change the situation they would be best suited for. Consider this brief summary of the ideal situation for both a MYGA and bond as a starting point to decide how they will impact your goals:
Ideal MYGA Situation
When goals require predictability over pure growth, MYGAs are a clear choice. Market performance may be a subject that intimidates those planning their future, especially if they have less than 10 years before retirement and hope to build wealth with less risk.
As a result of the set contractual periods of MYGAs, they also provide a clear retirement timeline in exchange for less liquidity, which can have early withdrawal fees. MYGAs are usually tax-deferred, which can be appealing for high earners, especially if they value consistent growth over access to funds.
Ideal Bond Situation
Whereas MYGAs provide more predictability, bonds prioritize flexibility. They are more ideal for those who are comfortable with some market fluctuation and more direct control over their accounts. Due to higher liquidity, bonds can be redeemed at shorter notice and with fewer penalties than many MYGAs. They can also be easily diversified with multiple bonds to maintain broader options, despite lacking contractual guarantees of returns. For those who less risk-averse, bonds can be a complimentary addition to MYGAs.
Qualified Financial Planners Help Pre-Retirees Secure their Legacy
MYGAs and bonds offer similar benefits, but their differences can change the situations that would make one preferable over the other. Most of the differences revolve around predictability vs liquidity, with MYGAs often being preferable for those with less tolerance for market-based risks and bonds being more appropriate for those who value access to liquid funds.
However, both MYGAs and bonds can adapt to individual retirement situations, and both can be used as part of a well-balanced retirement profile, in addition to Social Security and other accounts. At Matador Insurance, our goal is to customize financial retirement profiles for each individual’s needs and risk tolerance to meet their goals.
Contact us today and schedule a financial consultation to learn about the differences between MYGAs and bonds and how our advisors can help.