Whether annuities are your primary product or a complementary portfolio solution, Multi-Year Guaranteed Annuities (MYGAs) are emerging as a valuable piece to consider in a retirement strategy. If you’re looking for creative ways to maximize MYGAs, consider a laddering structure.
What is MYGA Laddering?
MYGA laddering is similar to the concept of CD laddering or Bond Laddering.
It’s where a client purchases several MYGAs, with different guaranteed terms, typically between 2-10 years. The number of annuities purchased, and the different guaranteed terms, vary depending on the client’s situation.
4 reasons a client would want to ladder MYGAs:
1. RATE OF RETURN & ACCESSIBILITY
WHAT: Increase average rate of return on premium, while giving increased accessibility when compared to purchasing only a shorter or longer term MYGA.
WHY: If your client doesn’t want to lock-up too much money in case they need access, but they also want to earn as much interest as possible, laddering may work for them.
HOW: By laddering MYGAs, a client can have portions of their money available every year while still earning higher rates on the portions placed in the longer term MYGAs.
2. INTEREST RATE FLUCTUATIONS
WHAT: Create a strategy to address the unknown fluctuations within the interest rate environment.
WHY: Because it is impossible to predict how quickly or how much rates will change, one strategy is to ladder MYGAs between 2 and 10 years. It gives both good current income and future flexibility.
HOW: If rates go up, you can re-apply the funds from the shorter term MYGAs as they become available to new MYGAs with higher rates, but if rates come down, you will still have some funds in longer term MYGA with the higher rates that were obtained when purchasing those MYGAs.
3. EXTRA LIQUIDITY
WHAT: Provide for extra liquidity needs in the future for either expected or unexpected needs, e.g., unforeseen early retirement, health concerns, or large purchases.
WHY: Having liquidity options is helpful for those in retirement, and those who are getting close to retirement.
HOW: By laddering MYGAs with several guaranteed rate periods, the client will have a “bucket” of money available each year without any penalties to access it. This will allow the client the option to withdraw some or all of the funds if needed, if not they can re-apply those funds to a new MYGA.
4. INCOME PLANNING
WHAT: For income planning purposes, clients may want to increase their income over time to offset inflation.
WHY: For this scenario a client may already have a guaranteed income stream from either a pension, Social Security or from an annuity. But these income sources might not be keeping up with inflation.
HOW: Provide an opportunity to increase a client’s income by ladder MYGAs and annuitize the annuity at the end of its guaranteed period to give a bump in income for the client.
How does laddering work?
With today’s interest rates, shorter term MYGAs (2-5 years) have some of the best rates.* Here is an example using 2-5 year duration MYGAs.
Client has $1,000,000
- Split into 4 equal $250,000 MYGAs, one for a 2-year, 3-year, 4 -year and 5-year duration.
- As an example of hypothetical rates, a 2-year MYGA rate is 4.25%, 3-year is 4.80%, 4-year is 5.05% and 5-year is 5.40%. This gives an average annual rate of 4.875%
- Starting at the end of the 2nd year, the client will have $250,000 coming out of surrender every year for the next 4 years.
- The client would be able to take the funds each year and use them if needed, if not they could purchase a new MYGA.
Who’s it for?
Laddering MYGAs is great option for clients who have money sitting in bank products like CDs, money markets and savings accounts, in bonds, or those clients sitting on cash and hesitant to invest.
Usually, these clients are looking for principal protection and a guaranteed rate so they can count on a return every year, though typically these clients are unhappy with the lower yields they tend to receive from banks and bonds.
*Rates are as of blog publish date
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Whether annuities are your primary product or a complementary portfolio solution, MYGAs are emerging as a valuable piece to consider in a retirement strategy.
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