Multi-year guaranteed annuities (MYGAs) can be an effective part of any retirement plan, allowing pre-retirees to create another source of safe and predictable income. However, the rates and terms of MYGAs differ from other types of annuities and can change the options available once the contract matures.
With the right terms and in the right situation, a MYGA can provide support for other types of retirement income, including social security, though no single financial product is perfect for every situation. To better create a clear and guided plan for retirement strategy, this step-by-step guide takes pre-retirees through the process of MYGA rates, terms, pros, and cons.
Step 1: Understand the Contract Rate
“Rate” can mean several things when opening a MYGA, and pre-retirees should know the differences before purchasing. The contract rate sets the guaranteed fixed interest for the term of the account and also determines how interest is credited and compounded. Depending on the terms, interest may be paid annually or compounded, which affects year-over-year growth.
Pre-retirees should also understand new-money rates and renewal rates.
- The new-money rate is the offer provided when the contract is funded, and it sets the guaranteed growth for the term.
- The renewal rate applies once the initial term ends and is not guaranteed.
Since new-money rates can vary between providers and over time, it’s wise to compare multiple offers. Monitoring renewal rates also gives pre-retirees an opportunity to shop for competitive terms. The goal is to secure stable returns that support retirement budgets, especially as retirement approaches.
Step 2: Choose the Right Term Length
MYGAs are typically offered in 3, 5, 7, or 10-year terms. Choosing the right term depends on the retiree’s situation.
Shorter terms can be more useful closer to retirement or in a volatile market, as they provide more opportunities to adjust rates.
Longer terms often pay higher interest and may suit pre-retirees with more time before retirement.
Laddering multiple annuities is another strategy which spreads risk and ensures that when one account matures, others continue growing at their original rate. This approach helps manage timing risks while maximizing stable returns.
Step 3: Consider Liquidity & Access
Before choosing a MYGA, pre-retirees should understand how and when they can access their funds. Many MYGAs allow up to 10% of the account to be withdrawn each year without penalties, known as free-withdrawal provisions. Withdrawals above this limit may trigger surrender charges, which reduce the value of the account.
It’s also important to check how a MYGA behaves within an IRA. For example, required minimum distributions (RMDs) still apply, so pre-retirees should confirm how the annuity handles these withdrawals. Understanding liquidity options helps prevent unexpected fees and ensures funds are available if needed before the contract matures.
Key tips:
- Confirm the free-withdrawal amount and any surrender penalties.
- Ask how the MYGA handles RMDs if held in an IRA.
- Plan withdrawals carefully to avoid reducing long-term growth.
Step 4: Evaluate Market Value Adjustments
A market value adjustment (MVA) may affect the value of a MYGA if funds are withdrawn before the contract matures. Depending on interest rate changes, the adjustment can increase or decrease the withdrawal amount.
For most pre-retirees, MVAs are only relevant if early withdrawals are expected. If the funds remain in the annuity until maturity, the MVA does not impact the account. Always ask the insurance company to explain the worst-case MVA scenario for your contract so you can plan accordingly.
Key takeaways:
- MVAs affect early withdrawals, not funds held to maturity.
- Rising rates can increase the adjustment; falling rates can decrease it.
- Clarify the MVA terms with your provider before committing.
Step 5: Plan Options at Maturity
When a MYGA matures, pre-retirees have several ways to access or manage the funds. Common options include:
- Renew the MYGA: Extend the term with the same or new rate, depending on the provider’s offer.
- Transfer to another annuity: Move funds to a different product that may better fit your current goals.
- Systematic withdrawals: Take regular distributions to create a predictable income stream.
- Annuitize the account: Convert the balance into lifetime payments for ongoing retirement income.
These decisions should align with other retirement accounts, such as Social Security, pensions, or IRAs. Working with a financial advisor can help determine which option maximizes income while meeting long-term goals.
Step 6: Weigh Risks & Tradeoffs
No retirement account is perfect, and MYGAs come with important considerations. Pre-retirees should evaluate the following:
- Limited liquidity: Accessing funds before maturity can trigger surrender charges or market value adjustments.
- Inflation risk: Fixed growth may not keep pace with rising costs over time.
- Rate variability: New-money rates and renewal rates can change, affecting future returns.
- Provider considerations: The reputation and financial strength of the insurance company matters.
- Impact on other accounts: Consider how the MYGA fits with Social Security, pensions, and other investments.
Asking your advisor key questions about these factors helps ensure the MYGA aligns with your retirement goals while minimizing unexpected costs or shortfalls.
Step 7: Work With Matador to Compare & Choose
Once you understand rates, terms, liquidity, and risks, the next step is finding the MYGA that fits your retirement plan. At Matador, we help pre-retirees:
- Compare current rates across multiple providers.
- Evaluate term lengths and laddering strategies.
- Integrate MYGAs with Social Security, pensions, and other accounts.
- Perform annual reviews to adjust for changing rates or goals.
Our team provides personalized guidance to ensure your MYGA selections support stable income and long-term retirement security.
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