Personal finance journalists and advisors have often discouraged people from buying annuities for retirement income because financial products can be complicated and fraught with high, hidden fees. But rising interest rates are now making a certain type of annuity — known as a multiyear guaranteed annuity, or a MYGA — worth considering, experts say. “”If a salesman says: ‘You really need to buy it because this deal is expiring,’ let him go.”” – Stan Hathcock, fixed-annuity salesman in Ponte Vedra Beach, Florida Generally speaking, annuities There is one. A financial contract where you pay an insurance company a lump sum — often $20,000 or more — and the insurer guarantees to send you regular payments for the rest of your life. The guarantee is from the insurance company, not the federal government. “An annuity is a legal contract. Some annuities are great and some stink,” Pam Krueger, founder of financial advisory vetting firm Wealthramp.com, said on a recent episode of the “Friends Talk Money” podcast. (Full disclosure: I co-host that podcast with Krueger and personal finance journalist and author Terry Savage.) Also on MarketWatch: Many retirees can’t wait until 70 to collect Social Security benefits, but they can if they use this strategy.What is MYGA Annuity? MYGA annuities are the insurance industry’s version of bank CDs. It lets you lock in an interest rate for a period of two to 10 years; The upper range of current rates is around 5.5% to 5.8%. When the term ends, the rate can be increased or decreased at the discretion of the insurance company. MYGA increases income tax deferred. But unlike the benefits of tax-deferred IRAs and other retirement savings products, MYGA benefits are taxed as regular income when withdrawn, not as capital gains, which typically have lower taxes. Because current interest rates are so high, “multi-year guaranteed annuities are flying off the shelves,” said Stan Hathcock, a fixed-annuity salesman in Ponte Vedra Beach, Florida. Annuity sales, in general, have been very strong recently, growing 22% in 2022, according to the Life Insurance Marketing and Research Association, an industry trade group. Sales of fixed-rate annuities have doubled from last year. Be sure to read: Things You Never Knew About Annuities And: Deferred annuities are better deals than immediate annuitiesFive caveats about MYGA annuities But there are five things to keep in mind before buying a MYGA annuity: First, a guarantee is only as strong as the insurance company behind it. Credit rating agencies such as Moody’s MCO, -0.49% , Standard & Poor’s and AM Best assign letter grades to insurers for their financial health. Hathcock said that in terms of safety, US Treasuries are at the top, followed by bank CDs – the Federal Deposit Insurance Corp. Backed by (up to $250,000 per depositor per bank) – and then MYGA. If an insurer is unable to make promised payments, annuity holders may receive less than they expected. State insurance guarantee funds act as a backstop for fixed annuities like MYGAs, but have dollar limits on their payouts. Each state has its own rules; The typical coverage limit is $250,000. New Jersey’s limit is only $100,000; Connecticut, New York and Washington are as high as $500,000. Second, an insurer’s MYGA guaranteed rates do not necessarily reflect interest rates on bank CDs or Treasuries. “When the Fed has been raising rates recently, a lot of annuity companies have actually reduced their guarantees,” Hathcock said. “When these companies are getting enough money, they just don’t raise rates for any reason [Fed] Chairman Powell did. Third, MYGA rates depend on where you live and what you choose. “Annuals are issued at the state level, so each company has to get state approval,” Hathcock noted. Once an insurance company is approved by the state, the company can determine the rates it will offer. Recently, three-year MYGA guarantees in Alabama ranged from 2.5% to 5.75%. In Wyoming, they ran from 2% to 5.53%. Recently, overall rates are highest at 5-year and 7-year MYGA. Right now, “if the time frame you’re looking for is less than three years, buy CDs and Treasuries; If those three years have passed, a multi-year guarantee annuity will provide more contractual guarantee,” Hathcock said. Fourth, if you need to withdraw money from MYGA during its guarantee period, you may have to pay a surrender charge. Each insurance company has its own rules regarding withdrawals. Some let you withdraw up to 10% of your account balance each year without penalty; The other is not. So, before buying a MYGA, think about whether you want to withdraw some of your money during its guaranteed period and buy accordingly. Fifth, returns on MYGA annuities – like other fixed annuities – can be eroded by inflation. “Even 3% inflation will cut your spending power in half in less than 25 years,” Savage noted. Learn more: Should you buy an annuity for your retirement?A risky type of annuity Also worth remembering: MYGA annuities are very different from risky annuities whose returns are tied to the stock market, known as index-linked annuities or fixed-index annuities. They allow you to get a fixed return on the stock market, but with a limit called a “cap”. Some index-linked annuities buffer you against stock market losses. Hathcock has two more tips for buying an annuity: The first is: “If a salesman says: ‘You really need to buy it because this deal is going away,’ let him go.” Second: “If you can’t convince a 9-year-old, you shouldn’t buy it.” Richard Eisenberg is the former senior web editor for Next Avenue’s Money & Security and Work & Purpose channels and the site’s former managing editor. He is the author of “How to Avoid a Mid-Life Financial Crisis” and personal finance editor at Money, Yahoo!, Good Housekeeping and CBS MoneyWatch. This article is from NextAvenue.org, ©2023 Twin Cities Public Television, Inc. Reprinted by permission of All rights reserved. More from Next Avenue:
