A multi-year guaranteed annuity is a type of fixed annuity, much like the traditional fixed annuity but with a more extended contract. These contracts are typically signed for 2-12 years and are an excellent choice for those nearing retirement who don’t want to take the riskier option of a variable annuity.
Multi-year guaranteed annuities provide principal protection much like that of a certificate of deposit, but usually with higher interest rates. You will also have more flexibility to withdraw partial sums before the end of the contract.
How Does A Multi-Year Guaranteed Annuity Work?
A multi-year guaranteed annuity (MYGA) is a contract signed with an insurance company where you pay a premium amount. You are then given a guaranteed interest rate on that amount for a set amount of time. The term can be any number of years that you choose.
The MYGA will take your lump sum and allow it to accumulate interest over time. You will get back both the principal payment you paid and the interest you accrued throughout the contract at the end of the allotted time frame. Certain companies allow you to make partial withdrawals once a year, whereas others may charge you a fee.
You do not have to pay tax on the interest until you withdraw the funds, which allows the interest to compound year after year without tax interference. Then, at the end of the contract, you can choose to remove the funds or transfer them into another annuity or tax-deferred investment option and put off the tax payments.
Pros And Cons Of A Multi-Year Guaranteed Annuity
There are many options available to you when determining how best to save your money for retirement. If you don’t want to risk a variable annuity or any other investment type option, fixed annuities are certainly an excellent choice.
An MYGA allows you to hold on to the interest rate you’re comfortable with for several years without worrying about market fluctuation. To summarize, some of the benefits of a multi-year guaranteed annuity include:
- Tax benefits
- Withdrawal flexibilities
- Principal protection
- Very few fees
- Less complex than other annuity options
- Fixed interest rate
Despite being one of the safest annuity options, there are still certain risks involved with an MYGA. For instance, they are not insured by the FDIC like an IRA or 401k. Insurance companies sell annuities, so the government can’t guarantee that company won’t go bankrupt or experience other financial difficulties.
However, they are protected by the state associations that all insurance companies must be a part of. These associations can typically pay back up to 250k or whatever the state limit is. With a high value retirement plan or savings, this may be enough to ease any anxiety you have about placing your money in an annuity. As we’ve seen, there are far fewer disadvantages than there are benefits to an MYGA:
- Not FDIC insured
- Possible withdrawal fees
- Possible gain caps
Is A Multi-Year Guaranteed Annuity Right For Me?
If you are coming close to retirement and want to be able to plan right down to the penny without risk of loss, an MYGA may be an excellent option for you. A guaranteed retirement income annuity is the safest way to ensure you make money off your principal while your contract runs its course.
A Multi-Year Guaranteed Annuity will likely not have as much opportunity for growth as other annuities, but those others will come with much more risk. An MYGA is for those who aren’t too sure about annuities but want to see their savings expand. It’s not much different from a certificate of deposit (CD), except you will be getting more money back and will likely have more flexibility in withdrawal.
If you think you might need access to the funds before the contract, you can continue researching which financial product will suit you best. For example, if you want your money to be liquid and available, MYGAs might not be the best option. On the other hand, while some can make partial withdrawals, you may be looking at hefty fees to take out any more than the agreed-upon limit.
If you want to make sure you’re not locking up all your money for an extended period, a good option is to ladder your accounts. For instance, you could do something like buying three different accounts, one to come due at 2, 5, and 10 years respectively. This way, you will consistently have money coming due.
Plan For Your Retirement With Matador Insurance
When planning for retirement, you not only have to think about yourself but your loved ones as well. There are countless options available to you depending on your specific needs, and the Matador Insurance Team is here to help.