Adjusting for Inflation With a MYGA
I'm amped; I’m ready to go. I feel good because we have a good topic today about Multi-Year Guarantee Annuities and how they solve for inflation, how they can solve for inflation, and at least address it pragmatically and contractually.
History of MYGAs
All right then. We're going to talk about Multi-Year Guarantee Annuities. Let's do a little bit of a history lesson. This is the annuity industry's version of a CD, a certificate of deposit. Is it a CD? No. It's an annuity, a Fixed-Rate Annuity. Still, with a CD, as you probably know by now, you lock in a specific interest rate for a specific period of time that you choose with a multi-year guaranteed annuity that a life insurance company issues.
There are some MYGAs that have simple interests, but most of them are compound interests.
You lock in a specific interest rate for a specific period of time that you choose. The primary difference between Multi-Year Guarantee Annuities and CDs, number one, is the backing of CDs, which is FDIC insurance. It's the best coverage you can get. F stands for Federal. F stands for; we’re going to freaking tax you and get the money. F stands for good. It's the best coverage you can get out there. With multi-year guaranteed annuities, those have a backend of the state guarantee funds.
Claims Paying Ability (CPA)
Now, don't buy the annuity for that; buy the annuity for the claims-paying ability of that multi-year guaranteed annuity issuing carrier. Now, state-guarantee funds are fine. Every state has one, and every state has a different dollar amount that they'll back a policy to a specific limit, but understand this in the annuity industry, you cannot use the state guarantee fund in a sales pitch. You can't lead with that. You really can't, and you shouldn't. You should buy the annuity for the claims-paying ability of the carrier, the radiance, and the solvency ratio. Ask me when we get on the phone to say, hey, is this a good company? Can they back up the claims? That's what you look at and the other differences: multi-year guaranteed annuities in non-IRA accounts.
You can own Multi-Year Guarantee Annuities in all accounts, Roth IRAs, traditional IRAs, and non-IRAs; in a non-IRA account, the interests grow and compound tax-deferred. There are some MYGAs that have simple interests, but most of them are compound interests. But it's the tax-deferred nature, whereas, in non-IRA CDs, you have to pay taxes on that interest every year but let's talk about inflation. Currently, the 10-year treasury and the treasury rates are at perceived lows, but if you compare those, the 10-year treasury equivalent across the globe in other countries, we still have the highest rates right now. That doesn't mean they're Jimmy Carter rates.
We all remember those great CD rates back in the day. We're probably not ever going to see that in our lifetime. How do you use MYGAs to address inflation? In my opinion, the way to do that is to ladder them. Let me give an example. I had a call the other day, a gentleman who is a doctor called up, and he said, “you know what, Stan the Annuity Man®, I think I want to do a $400,000 MYGA ladder.” I said okay, great. Let's do this. Let's put 100,000 in a two-year, a three-year, a four-year, and a five-year. At this time, you can buy longer-duration Multi-Year Guarantee Annuities, but five years is the sweet spot, in my opinion. So we had a two-year, three-year, four-year, and five-year.
The way that addresses inflation is you have money coming due and maturing, that policy maturing starting in year 2, and at that time, you could either cash the money out with interest, get the money sent back to you, you could roll it, or do a 1035 transfer non-taxable event or IRA to IRA transferred non-taxable event. This hopefully will give a higher guarantee so that every year starting in year 2, I'm going to be on the phone with him and say, what do you want to do? You want the money back; you want to roll it? Do you want the money back, or do you want to roll it? Until five years. A lot of my clients do that. They keep rolling and rolling and rolling these interest rates, which is fantastic.
The great news about Multi-Year Guarantee Annuities and CDs as well is that there are no annual fees, no moving parts, and no market attachment. It's very easy to understand. The commissions are very low. They're built into the policy just like administrative costs, light bill, water bills, whatever from these annuity companies. It's just part of the administrative costs, but if you put a $100,000, then you're going to say $100,000 go to work for you.
From an inflation standpoint, there are no good answers, just bad sales pitches with inflation. Now, people always ask me, hey, Stan the Annuity Man, America's annuity agent, how does this multi-year guaranteed annuity yield more than a CD? That doesn't make sense. Banks may be nice sometimes, but their CD rates are horrific. How's this multi-year guaranteed annuity beat that? Well, remember, life insurance companies issue annuities. They issue all types, including multi-year guaranteed annuity MYGAs, but there's a dynamic pricing model with life insurance. They're not just looking at the 10-year treasury or current interest rates; they have bonds in the portfolio that have been there for decades. They issue life insurance; they know when we're going to die. They know how to price that. They issue lifetime income products, meaning you're giving them a lump sum of money, and they're giving you money back over your life expectancy. Then they look at current interest rates and other things happening within the company. In other words, they're not just pulling from just the current interest rate level, they're pulling from a myriad of strategies within their portfolio to price that multi-year guaranteed interest rate that you're seeing. That's the reason that they're higher. Does that mean they're better than CDs? In the world of protecting your principal and getting a guaranteed interest rate, it's a pretty good option.
Are MYGAs Safe?
Is an MYGA a good investment? Is a MYGA safe? That's good questions to have, and I will ask them for you. Is it safe? It depends on the claim expandability of that carrier. With MYGAs, I take a little bit different approach from the analysis standpoint. If you're asking me, Stan the Annuity Man, America's annuity agent, I'm looking at a lifetime income straight for me and the wife or me and the husband. Well, that's a different analysis. Can that company pay a lifetime income stream for your projected life expectancy for as long as you're breathing?
However, with MYGAs, it's a little bit different. I'm looking at the duration. Let's just say there's a B++-rated company that has a two-year or a three-year multi-year guaranteed annuity and that interest rate is the highest one out there in the country. Your question has to be, "Wait a minute, Stan the Annuity Man, I would really like to have an A++ company be the one at the top. What do I do, Stan? Do I buy the B++ company?" Well, I'm going to tell you if I think it's safe.
I'm going to put my rear end on that line, but I'm only looking at the duration. If you're saying, Stan, I'm looking at this two-year, should I buy that? I'm going to say I think they can back up that claim for those two years because, after those two years, we're going to be gone. They're going to send you the money because you want to cash it in, or we're going to roll it to another annuity, and most likely, it will be with a different carrier unless that carrier has a high renewal rate. In other words, I'm doing a different analysis. I'm saying, can they back up the three-year claim? Can they back up the two-year claim? Can they back up the five-year claim? That's a completely different analysis when compared to, can they back up a lifetime income stream? I'm not saying we're bottom fishing, but we're realistically looking at how long your money will be with that life insurance company when you buy this MYGA.
I hope that helps when we get to the finish line of you making a decision, do I implement that into my portfolio? If you decide to work with us, you will be working with the best team on the planet from an administrative side. We take care of everything from start to finish, whether IRA, non-IRA, Roth IRA assets, or whatever you choose. Still, when it comes to inflation, we're just going to have to ladder things because nobody knows where inflation will go. Nobody can predict whether interest rates will go higher or interest rates will go lower.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.