One of the most taken-into-consideration financial decisions that people consider at an early stage of life is an investment in a multi-year guaranteed annuity. As with any investment strategy, the timing of buying a MYGA will remarkably alter its probable benefits and overall efficiency in one’s current financial portfolio.
This article explores the pros and cons of investing in a MYGA during different life stages to help you decide whether it’s better to invest early or later in your life.
Understanding MYGAs
Before discussing the appropriateness related to the timing of a MYGA investment, there has to be clarity as to just what these financial products are. Multi-year guaranteed annuities are fixed annuity types that extend returns on invested funds for an annually fixed period but vary within ranges of three to ten years. MYGAs are known to be unshakeable and predictable instruments in demand by those customers who seek either safety income or security as one segment of diversified risk in their portfolio.
MYGAs work just like CDs but generally offer higher interest rates. When you buy a MYGA, you are essentially lending money to an insurance company in return for a series of interest payments over a fixed, or guaranteed, term. At the end of the term, you can renew the contract, withdraw, or take the accumulated value as a series of income payments.
Investing in MYGAs Earlier in Life
Advantages of Early Investment
The advantages of investing in a MYGA can be accrued earlier in life. First and foremost, there is the power of compound interest. The earlier you start, the more time your money has to grow, and when you reach retirement age, you may have a bigger nest egg.
Early investment in MYGAs can also be an effective forced savings strategy. Young investors may find it difficult to keep themselves away from the temptation to spend their disposable income. By investing a portion of their income in a MYGA, they are putting themselves into a compulsory savings mode that could build wealth over time.
Possible Shortcomings
While there are advantages in investing early into MYGAs, there is also the other side, which is not so bright. The first consideration is the opportunity cost. For a young investor, committing funds to a fixed-rate product means giving up the potential for higher returns on more aggressive investments, such as stocks or real estate.
Furthermore, young professionals have more important uses for their money, ranging from paying off student loans to building a down payment on a home or building an emergency fund. Investing a big chunk of money into a MYGA will leave meager amounts to attend to immediate financial needs.
Later-Life Investing in MYGAs
Advantages of Investing Later
Investing in MYGAs later in life, especially as retirement draws near, may have its advantages. As people approach retirement age, the ability to take on risk diminishes, and the desire for stable, guaranteed income increases. MYGAs can provide this stability and help protect a portion of retirement savings from market volatility.
MYGA investments made later in life can also be a useful tool in retirement income planning. Retirees who stagger the purchases of MYGAs with different maturity dates can create a “ladder” of guaranteed income streams to complement other retirement income sources, such as Social Security or pension payments.
Possible Limitations
The important factor to consider regarding MYGAs is that, although they may create some sense of stability in later investment years, this product has several limitations. The main disadvantage is having fewer years for the power of compound interest to take effect. Pre- and post-retirement time limits restrict earning potential compared to other options initiated well before retirement age.
Another consideration is potential liquidity needs later in life. Healthcare expenses, long-term care needs, or other unforeseen circumstances may require access to funds. If a large portion of one’s savings is tied up in these products, it could be challenging given the surrender charges and tax implications of early withdrawals from MYGAs.
Factors to Consider When Timing MYGA Investments
Current Financial Situation
Irrespective of age, one’s current financial situation is a factor to consider when deciding the right time for investment in a MYGA. Careful considerations should include income stability, debt obligations, and general financial goals before placing funds into a MYGA.
Interest Rate Environment
The attractiveness of MYGAs can be determined by the prevailing interest rate environment. In a low-interest-rate scenario, locking in an assured amount for a protracted period may be advantageous. In a rising rate environment, shorter-term MYGAs and other investments could be more desirable.
Risk Tolerance and Investment Goals
Everything depends on one’s risk tolerance and investment goals. A person who has a high-risk tolerance and is in pursuit of the highest possible growth may not consider it prudent to invest a large part of their portfolio in MYGAs, even at a young age. Conversely, an investor who places a premium on stability and guaranteed income could find that MYGAs have a more prominent role in their portfolio, regardless of age.
Tax Implications
Yet another timing factor is the impact of MYGAs on income taxes. While tax-deferred growth means one does not have to pay annual taxes on the interest gained by the investment, all principal and interest eventually become taxable once withdrawn. Individuals in higher tax brackets who expect to move to lower brackets in retirement can leverage this to greater advantage.
Balancing MYGAs with Other Investments
No matter when you plan to invest in MYGAs, everything should fit into a well-balanced and highly diversified investment portfolio. MYGAs can be considered just a portion of an overall financial strategy which may include stocks, bonds, and real estate.
This may mean that younger investors should have a smaller percentage in MYGAs and more emphasis on growth-oriented investments. As retirement draws near, a gradual increase in the allocation to MYGAs and other fixed-income products could be a strategy to protect accumulated wealth and provide income stability.
According to a recent study, annuities have gained popularity among investors, with total annuity sales reaching $385 billion in 2023. This trend suggests a growing recognition of the role annuities, including MYGAs, can play in retirement planning.
Strategies for Maximizing MYGA Benefits
Laddering Approach
One of the most effective ways to maximize MYGAs is to use a laddering strategy. This means buying multiple MYGAs with staggered maturity dates. This approach allows you to capture potentially higher interest rates at the maturity of each MYGA while maintaining a consistent income stream.
Combining MYGAs with Other Types of Annuities
Another method involves blending MYGAs with other types of annuities, including variable or indexed annuities. This may provide a balanced approach toward guaranteed income with some growth potential. This strategy makes your annuity portfolio personalized and adjusted to your needs and risk tolerance.
Ongoing Review and Adjustments
Regardless of when you start investing in MYGAs, it’s crucial to regularly review and adjust your strategy. As your financial situation, goals, and market conditions change, you may need to modify your MYGA investments accordingly. This might involve reallocating funds, adjusting contract terms, or exploring new MYGA products as they become available.
Final Thoughts
Whether to invest in a multiyear guaranteed annuity earlier or later in life depends on your particular circumstances, financial goals, and risk tolerance. Though early investment allows for the advantages of compound growth and long-term stability, investment at a later date may provide an excellent opportunity for protecting retirement with the benefits of an income guarantee.
The key to making the most of MYGA investments is to understand one’s needs, carefully consider all the factors that affect their effectiveness, and integrate them into a well-rounded investment strategy. With thoughtful and balanced investment in MYGAs, one can build financial security to realize long-term financial goals at whatever stage of life one decides to invest.
