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Finding safe returns in a zero interest rate environment

The Federal Reserve recently signaled that it's likely to keep interest rates at zero through 2023. This is bad news for savers and retirees who are looking for a safe place to park their cash. Gone are the days where you could leave money in a bank to earn 4-5%. In response, investors have been forced to take more risk, often investing in lower quality bonds or more stocks. Faced with a weakened economy from a global pandemic and an uncertain Presidential election, where can retirees look for a safe return? One potential solution is multi-year guaranteed annuities (MYGAs).

What are MYGAs?

Multi-year guaranteed annuities, a type of fixed annuity, offer a guaranteed fixed rate of return for the duration of the product, typically 3-10 years. They provide a tax-deferred benefit and offer a higher return than CDs and Treasuries. Similar to CDs, MYGAs offer complete downside protection by guaranteeing a minimum rate of return. While US Treasuries are considered to have the bond market's lowest risk because they are guaranteed by the U.S. government's “full faith and credit,” MYGAs carry default risk of the insurance carrier. When considering any annuity product, it's advisable to stay with the biggest, highest rated insurance companies and to keep your investment amount below state insurance limits.

Downsides of MYGAs

Due to the long-term design of the annuities, most have surrender periods required to deliver the product benefits. It is important to limit the amount invested in an annuity for a portion of your money that you can afford to lock up for the stated term.

Many MYGAs are sold by commissioned agents, and sales commissions paid out to agents can eat into your potential returns. One study by DPL found that eliminating commissions allowed for interest rates that are 1.12% higher on average when compared to traditional fixed annuities. Although not widely known, commission-free MYGAs are sold by the same insurance carriers, offered through fee-only financial advisors who know about them.

Rate Advantage

MYGAs offer higher rates than CDs, therefore, they may be a good option for a conservative/safe part of your investment portfolio and overall financial plan. For example, the Security Benefit Advanced Choice Annuity has a 4-year term and offers a 2.9% interest rate on purchases of $125,000 or more. This compares to new CD issues of 0.5% or Treasuries at just 0.27% for 5-years.

Once you understand the pros and cons of multi-year guaranteed annuities, MYGAs can help investors find income in today's low interest rate environment. Prior to signing any annuity contract, consult an advisor to review your financial situation to see if a MYGA makes sense for you.

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Have you ever purchased a multi-year guaranteed annuity? 

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About the Author: Chris Wang

Chris Wang

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