Many fortunate investors bought 10-year fixed annuities a decade ago, when interest rates were markedly higher as a direct result of the Great Recession. These annuities – specifically Multi-Year Guaranteed Annuities (MYGAs) — offered much better rates than now available, typically 6 ½% to 7% and even a bit higher in select cases – but they’re on the cusp of maturing.
This raises an obvious question – what are these annuity investors to do?
There is more than one option. Probably the easiest choice – and not a bad one – would be to reinvest your proceeds in a new 10-year MYGA, which is yielding as much as 4.2% today, or in a seven-year MYGA yielding up to 4.15%. This is much lower than expiring contracts, to be sure, but inflation is also lower than it was a decade ago and unlikely to rise much amid a steady and ongoing stream of Federal Reserve interest rate hikes, as well as widely held expectations that the economy will begin slowing in 2019.
Also noteworthy is that 10-year and seven-year MYGA rates are up from roughly 3% in recent years.
But the easy path, of course, is often not the best one, and fixed rate investors probably would be wiser to invest in a ladder of fixed annuities because this increases the odds that at least one of these will expire when rates are higher, allowing annuity owners to reinvest their proceeds at a higher rate. An additional stream of Federal Reserve interest rates – another rate boost is expected in December, followed by three more in 2019 – makes this scenario highly likely.
The Fed’s intentions also signal that buying a 10-year or seven-year contract today could later fuel buyer’s remorse as investors realize they could have gotten a better deal had they waited.
One good MYGA ladder would contain a three-year, five-year and seven-year MYGA. (A seven-year MYGA is better than a 10-year MYGA because its rates are almost as high and it doesn’t tie up your investment as long.) At current rates, these pay, respectively, 2.90% to 3.25%, 3.55% to 4.05%, and 3.4% to 4.15%. When each contract expires, it opens the opportunity of buying a new annuity paying more.
If you think rates are likely to crest in, say, three years, you could fine-tune your rate bet and put disproportionately more money in the three-year MYGA in hopes of catching interest rates at or near their peak. Think twice, however, because the odds of correctly predicting the often twisting path of the economy and its impact on interest rates is not good.
MYGAS have surrender charges, but like other annuities often allow investors to withdraw 0% to 10% of their investment penalty-free. MYGAs do not charge annual fees and their interest, unlike a bank CD, grows tax-deferred.
Most MYGA investors never consider surrendering their contract. They make a simple investment, get a reasonable guaranteed rate of return and, by and large, don’t give their annuity much thought. There is a lot to be said for this in an investment world replete with complexity and uncertainty.
Another option that most agents and advisors are advocating for during this low interest rate environment is the Fixed Index Annuity “FIA”. The FIA is a fixed guaranteed annuity and because it is fixed and because there is no risk to your principal, there is no prospectus which, by definition, details the risk of an investment. In addition because it is indexed to an index that is tied to domestic and/or global markets you receive market upside without any of the downside risk.
According to the agents and advisors we interviewed the vast majority feel that this is the best approach and strategy to come close to, if not surpass how their clients did in the previous 10-year period. There are indices available today that on a back-tested basis would have outperformed the S&P 500 by over 50% (9.34% versus 6.18% S&P annually) and even an apples-to-apples product pegged against the S&P beat the S&P by .85% average annually (7.03% versus 6.18%) over the past 10 years. That’s impressive, but what most impressive is the fact that both products achieved this with zero market risk.
Furthermore, just like the MYGAs there are no fees associated with these products, but for a fee you can add a guaranteed lifetime income benefit to these products if that is something you are interested in.
Investment Nirvana? We shall see, but it’s hard to find too much wrong with a product that guarantees your principal, has no fees, participates in up markets, doesn’t participate in down markets and resets the participating index lower (so you don’t have to dig out of a deep hole). Additionally, these products offer on average 10% liquidity per year so that you can receive the income you desire.
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