Multi-Year Guaranteed Annuity (MYGA) Explained

Analysts at Wink Inc. recently reported an increase of 27% year-over-year MYGA sales in the second quarter of 2018.^[1] While Andesa Services does not offer financial advice, market or sell any insurance product, our current and prospective clients are in tune with the market and many have inquired about launching MYGA products in either a software-as-a-service and/or third-party administration basis. So, why is there so much energy and attention around MYGAs?

What is a MYGA?

A Multi-Year Guaranteed Annuity (MYGA) is a tax-deferred, fixed annuity that provides asset accumulation over a specified time horizon (typically 3-5 years). Often compared to CDs, MYGAs are a simple form of annuity primarily used to protect and grow funds as opposed to generate an income stream. The fixed, guaranteed rate design offers principal protection and reduces market risk. As such, they are most often sold by a financial advisor (licensed insurance agent) as a conservative position in an investment portfolio for someone in or nearing retirement.

MYGAs are insurance products guaranteed by the financial strength of the issuing insurer. Interest rates tend to be higher than bank CDs; and the tax-deferred design postpones taxes until funds are withdrawn, often when a person is in a lower tax bracket. Most MYGAs allow for some annual liquidity but subject funds to a 10% penalty if withdrawn before age 59½.

Increasing Interest

Demographics and investment strategy are driving an increased interest in MYGAs. For example:

• There are 77 million Baby Boomers, 10,000 of whom turn 65 every single day according to AARP. Boomers control approximately 70% of US disposable income and are expected to inherit approximately $15 trillion in wealth transfer over the next 20 years.

However, contrary to popular opinion, boomers are not well prepared for retirement. Vanguard recently reported an approximate average 401(k) balance of $178,000 for individuals in the 55-64 age demographic. Consequently, approximately 2/3 of the individuals in that demographic plan to work beyond age 65, and retirement planning is top of mind for many individuals seeking financial counseling.

• Risk tolerance decreases as this population nears and moves into retirement. Market volatility is an enemy as the time horizon narrows. It is not a surprise that the significant growth in MYGA sales in Q2-2018 followed the US stock market correction in February. For those nearing retirement, things like trade wars, oil supply and prices, international politics, etc., become major risk factors. Growth in MYGAs may indicate a preference for the safety and certainty of fixed rate, guaranteed asset accumulation, especially as MYGA rates have climbed over 3% for A-rated insurers.
• Outpacing inflation is one goal of fixed-income seniors. It is a competitive annuity market and insurers have reacted rapidly to adjust their contractual guarantees to track the Federal Reserve’s interest rate movements. In this regard, they have outpaced banks, which appear to have been slow to reward savers by increasing CD rates. Many market pundits expect the Federal Reserve to introduce smaller, more frequent rate hikes into 2019. If so, interest in MYGAs will likely remain high for the foreseeable future.

Of course, MYGAs are only one component within an investment strategy. A trusted financial advisor can assist with a proper investment outlook and possibly use MYGA components to reduce the risk of market volatility and the possible bite of inflation.

And, yes, Andesa Services continues to assist current clients and can help prospective clients with the launch and administration of a MYGA product.

Your reactions, thoughts, outlook, and recommendations are welcome. Hoping to hear from you and continue the dialogue.

[1] Think Advisors