If you are 50 years or older, right now is the perfect opportunity to buy a multi-year guaranteed annuity. 

Why? Well, I was in high school the last time interest rates were this high. 

And yes, that was a long time ago. 

High interest rates make things like mortgaging a home difficult. However, the higher-than-normal rates are driving up the promised returns on fixed annuities. 

If you’re worried about the volatility of the stock market or are tempted to drop your savings into a CD or a bank savings account, think twice! A fixed annuity offers greater returns. 

Plus, you get the added benefit of tax-deferred growth, which is key to this type of investment. 

Wait… I thought annuities were terrible investments?

When most people hear the word “annuity,” they immediately associate it with horribly high fees and predatory sales pitches. And that’s unfortunately true… if you’re talking about variable annuities.  

I refuse to sell variable annuities. The fees are very high — anywhere from 2 to 4% a year. That means your investment has to earn at least 4% just to break even. 

Further, a variable annuity is dependent on the market, your account can decrease in value if the market drops. In that respect, variable annuities are similar to mutual funds. 

To me, the purpose of an annuity is to let your investment grow, sheltered from the volatility of the market. For that goal, fixed annuities are an excellent solution — especially with the current interest rates. 

Fixed rate annuities come in two flavors: multi-year guaranteed annuities and equity index annuities. I’ll talk about the latter option in an upcoming blog. 

For now, let’s discuss the multi-year guaranteed annuity or MYGAs. 

How does a multi-year guaranteed annuity work? 

Great question! First, a quick definition. An annuity is an investment contract issued by a life insurance company.

A multi-year guaranteed annuity guarantees a fixed rate of growth over three to seven years. While a decent savings account might offer 2% interest each year, right now we can lock in a growth rate of 5.5% or more in a MYGA. 

Three years ago, the same product was offering only 2.9%. See how this is a great opportunity? 

Multi-year guaranteed annuities offer an additional benefit. Because the government wants to encourage people to save for their retirement, the growth of an annuity is tax-deferred. You don’t pay any tax until you take the money out of the annuity. 

Of course, the caveat of receiving the tax benefit is that you have to leave your investment until you’re 59 1/2 years old or pay a 10% tax penalty on the growth. However, deferring tax payments on retirement investments helps maximize their growth. 

Say your local bank offers a 5% rate of return on a 3-year CD. At the end of year one, a $100,000 investment will earn $5,000. You can’t withdraw that money, but the IRS still counts it as income. 

If you’re in a 34% tax bracket, you’ll owe $1,700 in taxes for that “phantom” income. When you subtract that from the year’s growth, you’re really only earning a 3.3% return. And you had to come up with the tax payment without touching the funds locked in the CD. 

Meanwhile, the same $100,000 investment in a multi-year guaranteed annuity will grow by 5.5% every year — without the tax hit or worrying about any market volatility. 

Who are MYGAs for? 

I recommend MYGAs to people who are 50 years or older and do not need to use these funds until after age 59 1/2. 

Over the long run, the stock market has historically yielded higher returns. If you’re younger, that’s a good option for your money. You benefit from big gains and tolerate any crashes because you have the time to recover from the dips. 

However, when you have a shorter time horizon, your exposure to risk should decrease. You’ve worked hard to build up the $1 million sitting in your IRA account, and you don’t want it to tumble overnight. 

That’s why you invest in a MYGA. 

If this describes you, give me a call. We offer fixed annuities ONLY from strong, highly rated life insurance companies. 

And because we’re a family-owned business of independent insurance agents, you’re guaranteed the best service.