MYGA Rates: Navigating Garbage Sales Pitches
What Is a MYGA?
So what is a MYGA? It's a Multi-Year Guarantee Annuity, M-Y-G-A. It's the annuity industry's version of a CD. So how do CDs work? You lock in the money for a specific duration, and during that duration, on an annual basis, you get a specific percentage. The same thing applies to MYGAs. You choose the term, the amount of time, two years, three years, four years, five years, seven-year, whatever. You lock in a guaranteed annual interest rate for that specific period of time. You control the money. You don't pay any annual fees. There are no gotcha fees. There are no moving parts. There are no market attachments. It is an actual interest rate you will receive, period.
CDs vs MYGAs
Now, if you compare CDs to MYGAs, they work well together. By the way, I don't sell CDs, but they work very well together. In a Multi-Year Guarantee Annuities in a non-IRA account, the interest grows tax-deferred, whereas, with a CD, that interest is taxable. Does that make MYGAs better than CDs? No, it does not, because you’ll eventually have to pay taxes on the interest taken out in a non-qualified account. Can you use an MYGA in an IRA? You can, and it's going to grow tax-deferred. Even though the IRA is tax-deferred, you don't get double tax deferral. And people always say, "Well, never buy an annuity inside of an IRA, Stan." That's uninformed. Yes, you can have a Multi-Year Guarantee Annuity inside of an IRA. You're buying the guarantee, period. And when you take money out, you're going to pay taxes on that money at ordinary income levels just like you do with any type of asset inside an IRA, okay? Multi-Year Guarantee Annuities can also be used in a Roth IRA. I'm not sure you'd want to do that because that's where I think you should have your true growth non-annuity assets, but you can put it in an IRA.
But here's what blows the top of my hat off my head. I'm a big proponent of MYGAs because they're simple. They're easy to understand. As I always say, if you can't explain it to a nine-year-old, don't buy it; no offense to nine-year-olds. But what happens in the hinterlands, flyover America, and big city America? Agents and advisors will try to talk people out of MYGAs and buy an indexed annuity. For example, I got to call the other day. The guy wanted to buy the five-year MYGA, but this advisor said, “you should buy an indexed annuity instead because it will get a better return.” That's not true, okay? Could it be true? Maybe if the unicorns chase the butterflies and the planets align themselves, but MYGA percentages, annual percentage, that's contractual. With an indexed annuity that's based on a call option. There's no guarantee with that.
Indexed annuities have a guaranteed account, but typically it's around that 1% range. So it's an apples and oranges comparison, even though indexed annuities were put on the planet in 1995 to compete with normal CD and MYGA rates. They're not market products. So I get very upset when people are trying to be convinced that they're saying, "Well, I want a three, four, and a five-year-laddered MYGA." Great. You're keeping the duration short. You're getting a guaranteed interest rate. There are no moving parts. There are no market attachments. And then someone's saying, "No, no, no. Buy a ten-year indexed annuity, and there's a possibility that you're going to get a better rate." Or they say, "Go here because we're going to give you an upfront bonus." The upfront bonus is candy for the stupid, okay? If you think a philanthropist at an annuity company wakes up in the morning and says, "You know what? I think I'm going to give money away today," you're wrong, okay? As my CEO says, and she's right, the upfront bonus in an indexed annuity pitch is just part of the 100 pennies in the dollar guarantee. That doesn't mean it's good. That doesn't mean you nudge your wife and say, "You know what? They're giving us 10% free money." Typically that bonus is applied to an income account, but I digress.
When you're looking for a short-term duration guarantee where you know what that percentage will be, then a Multi-Year Guarantee Annuity is your choice. Are there such things as five-year-type indexed annuities? Yes, but there's no guarantee on that return. You just have an indexed option where those levers of the limits on that upside, cap spreads participation rates, can be changed at the discretion of the annuity company. I'm not putting down indexed annuities. We like indexed annuities. We sell indexed annuities primarily as an efficient and cost-effective delivery system for the income rider guarantees when you need future income. But when you need short-duration, guaranteed interest rate strategies in your portfolio that are like short-term CDs, then MYGA's fit. MYGAs are the only fit. And the only reason that somebody's going to say, "No, no, no, no, no. Buy this indexed annuity instead of the MYGA," is because remember, commissions are built into annuities. In other words, if you put $100,000 in an annuity, you see $100,000 go to work for you.
The agent typically gets paid a one-time commission from the annuity company reserves. You don't see it. It's part of the overall administrative cost. But the commissions on indexed annuities dwarf MYGAs. They're huge compared to MYGAs, so most of the time, somebody's trying to talk you out of an MYGA purchase with an indexed annuity purchase. Now for all you indexed annuity people out there watching, send me the hate mail, but you know I'm right. You know I'm right about this because MYGAs is a simplistic, guaranteed annual interest rate product. And for the CD buyers who don't like the current CD rates, MYGAs are a good option if you want to keep the duration short. For those who are up in years, as they say, why would you want to lock anything up for ten years or seven years when you can go two years, three years, four years, or five years with an MYGA? So I want you to be very careful out there.
Swallow the Food, Not the Pitch
If you are in one of those areas where you get invited to the bad chicken dinner seminar, or the expensive steak dinner seminar, not one time will that be on MYGAs. You will not go to Ruth's Chris for an MYGA presentation; I will guarantee you that because it isn’t paying for the steak player, okay? Read between the lines when they're up there talking about a too-good-to-be-true product. It is no exception if any annuity pitch sounds too good to be true.
Here's the sales pitch with an MYGA. Are you ready? Principle protection, no moving parts, no annual fees, no market attachments, as short of term at the time of this taping as two years. You know what the interest rate will be because it's contractual. You can own it in IRAs, non IRAs, Roth IRAs. That's the sales pitch. That was about as sexy of a sales pitch as the shoe I have on. It's not sexy at all. It's reality. So don't buy these dreams that are out being pitched. Buy the reality. And if you need short-term paper, short-term guarantees, and maybe short-term laddering paper for short-term guarantees, MYGAs are your strategy.
Let me close with this. At the time of this taping, interest rates are at perceived all-time lows. I'm saying there's a possibility this is the new normal. And if you compare our interest rates to the same type of 10-year treasury and 30-year treasury rates as other countries, we still have the highest interest rates. But Jimmy Carter's interest rates aren't coming back and might not come back in our lifetime. So from the standpoint of interest rates, I understand that it's disappointing the rates being offered. But MYGAs right now is as competitive as it gets from a principle protection standpoint.
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.