Bob Carlson is editor of the newsletter Retirement Watch. He is a managing member of Carlson Wealth Advisors and chairman of the board of trustees of the Fairfax County (Virginia) Employees’ Retirement System. RetirementWatch.com
In today’s chaotic financial markets, cash is king. If you’re looking for safe, guaranteed income from your cash, nothing is as attractive as multiyear guaranteed annuities (MYGAs)—the annuity industry’s version of bank CDs. For comparison, the best five-year FDIC-insured bank CD carried a recent 4.42% annual yield…a comparable MYGA from a top-rated insurer yielded 5.2%. MYGAs are insurance contracts purchased through a licensed insurance agent in your state of residence. You can research and buy them on the websites of agents licensed in multiple states such as StanTheAnnuityMan.com and ImmediateAnnuities.com.
A MYGA’s annual interest rate is fixed for its entire term, which typically ranges from one to 10 years. Over that period, your principal’s value is guaranteed not to decline. Plus, all fees, expenses and agent commissions are included in your quoted interest rate.
Caution: There are surrender penalties for early withdrawals and minimum investment requirements of typically $10,000 or more. Stick with insurers that are rated A or higher. Defaults are rare, and your money is protected by guaranty associations in each state.
MYGAs vs. CDs: Many MYGAs allow you to withdraw up to 10% of your principal each year without penalty, and your interest compounds tax-deferred, even in a non-IRA account, until you withdraw the money. With a CD, you pay annual taxes on the interest you earn and an early withdrawal fee if you terminate before the end of the term. If you roll over a MYGA at the end of its term into a new MYGA or another annuity, there are no tax consequences and all taxes continue to be deferred until future withdrawal.