If you invest, say, $100,000 in a three-year MYGA today, and take no withdrawals along the way, you walk away with more than $107,000… in a five-year MYGA, you walk away with more than $116,000.
Most of the time, folks weighing the purchase of an annuity ask all kinds of questions. Which type of annuity is best for me and why? What maturity best fits my needs? If I want to dabble in the stock market, should I go “all in” with a variable annuity or hedge my risk with a fixed indexed annuity?
These days, though, the annuity landscape is markedly different. The majority of people shopping for an annuity overwhelming have just one question: How can I get a half-way decent rate of return?
“Today, a majority of prospective customers tell me that their bank CD is coming due, while new CDs are paying next to nothing, and ask me what they can do about it.”
Why Investors Prefer Annuities over CDs
In today’s highly unusual financial world – one in which interest rates are rock-bottom and highly likely to stay that way for at least a couple more years – the answer for most folks is very simple: Buy a plain vanilla fixed annuity (specifically, a Multi-Year Guaranteed Annuity, or MYGA). It’s very similar to a bank CD but issued by insurance companies, not banks, and pays markedly more.
To a lesser extent, fixed indexed annuities (FIAs) are also attracting attention because they offer stock market exposure and protect against losses. (Annuity FYI will also address them.) But MYGAs, by far, are where the action is today. They have much shorter maturities, pay interest annually, and are super simple to understand.
Banks Can’t Touch MYGA Rates
Most important, MYGAs pay markedly more than bank CDs. A three-year MYGA is paying up to 2.4% and a five-year MYGA up to 3.10%. By contrast, most bank CDs are paying only about 0.75% and five-year CDs only about 1%. The most generous CD on the market – a five-year product – pays only 1.35%.
When you look at interest rates, it’s best to compare them with the inflation rate. This tells you if you’re coming out ahead after taking rising prices into account. To do so, the interest rate has to be higher than the inflation rate. This isn’t the case with most CDs. According to the U.S. Department of Labor, the annual inflation rate in the U.S. was 1.2% for the 12 months ending in October.
If you invest, say, $100,000 in a three-year MYGA today and take no withdrawals along the way, you walk away with more than $107,000. If you invest that money instead in a five-year MYGA, you walk away with more than $116,000. Most annuity buyers prefer the three-year MYGA because they don’t want to tie up their money any longer than necessary.
FIAs Require Patience – But It’s Worth It
FIAs with the most growth potential are sold without a guaranteed lifetime income rider, which costs roughly 1% a year and so detracts from potential market returns. As mentioned, FIA owners are protected from market losses. In return, they receive only a portion of the increase in the underlying stock market index in a positive year, and these portions have been decreasing. Most prospective FIA buyers still have no problem with the trade-off. What is frequently an issue, however, is that most FIAS have 10-year maturities. Many people don’t want to lock up their money that long.
The Most Attractive Annuity Route of All: Laddering
What is probably best for most investors, assuming they have the funds to do so, is to hedge their income prospects through so-called laddering. This means they invest in different annuities with different maturities, recognizing that it’s impossible to know what interest rates will do as this decade proceeds and so it’s best to buy annuities that mature at different points in time. At these points, you’re likely to buy new annuities that hopefully pay higher rates than available today.
FIAs belong in an annuity ladder, most annuity pros say, notwithstanding their long maturities. For one thing, FIAs with shorter maturities, typically five or seven years, are available. Most important, FIAs without income riders typically invest in low-volatility indexes with high index participation rates and typically return an average annual return of 3.5% to 6% over time – more than MYGAs.
If all or most of this seems attractive, here are a few MYGAs and FIAs that stand out. All allow 10% penalty-free withdrawals starting at least by the second year. All FIAS cited are growth (no guaranteed income) FIAs.
A Look at Top MYGAs
- American Equity Guarantee Shield 3. This three-year MYGA pays 2.40% annually, the highest rate we could find for a three-year product. The next highest three-year MYGA pays 2.15% annually. American Equity, which is 25 years old, has an A.M. Best rating of A-. The minimum investment is $10,000.
- Western United Life Navigator Ultra. This five-year MYGA pays 3.10%. Western United has a B+ rating from AM Best. You cannot make any withdrawals for the 5-year period. Zero withdrawals. Max issue age is 75 years old. The minimum investment is $10,000.
A Look at Top FIAs
- Athene Protector 5. This five-year FIA – as short a duration as you can get – typically invests in two indexes: BNP Paribas MAD 5, a low volatility index (one that invests in bonds and commodities, as well as stocks), and the AIPEX index, an artificial intelligence-powered index that invests in 250 companies and rebalances monthly.
The participation rate is 80% on the BNP index and 75% on the AIPEX index.
In the highly unlikely event that the annuity earns no money over five years, investors still receive 7.5% on their principal. For an annual rate of 0.4%, you get penalty-free access to all of your principal. The minimum investment is $25,000.
- Midland National RetireVantage 10. This tracks the MARC 5 low-volatility index with a generous 110% participation rate. The participation rate among most competitors is 80% to 95%. RetireVantage has a top-notch A+ rating with A.M. Best.
To get the 110% participation rate, investors have to pay a 1 percent annual fee. Otherwise, the participation rate is 70%. Investors are highly likely to come out ahead if they pay the fee because the 110% participation rate is so much higher.
The minimum investment is $20,000.
- Security Benefit Strategic Growth Annuity. This offers a 70% participation rate on the Morningstar Wide Moat Barclays VC Index, a low-volatility index rebalanced monthly. (Those willing to credit earnings every other year, instead of annually, will receive a 90% participation rate.)
The minimum investment is $25,000.
One point of interest in this FIA is that its index invests in the most undervalued U.S. stocks. For a number of years, this has been a losing proposition. But it appears to be a winner now because value stocks have recently begun rising more than growth stocks, and may continue to do so. Given the likelihood of an economic resurgence next year, they are increasingly deemed to be undervalued.
Also noteworthy is that the Morningstar index has produced a positive return every year since 2004, with the exception of 2015. This means, of course, that it sidestepped the 2008 recession-sparked bear market. Most indexes are more volatile.
All of these annuities are highly attractive not only because they typically beat the competition but because they are an entire level higher than bank CDs. They are also considered relatively safe. Unlike CDs, they are not guaranteed by the Federal Deposit Insurance Corporation.
Over a long span of time, insurance companies have been safer than banks. In particular, they strutted their stuff during the Great Depression, when far more banks than insurance companies failed. Conservative investors want safety, as well as a competitive return, and good annuities provide both.
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