When considering saving for retirement, annuities can be a great option for creating a reliable stream of income in your golden years. There are several different types of annuities available, each with different features and benefits. Two popular options are fixed indexed annuities (FIAs) and multi-year guaranteed annuities (MYGAs). In order to decide if either an FIA or MYGA is right for you, it is important to understand the basics of how these solutions work.
An FIA is an annuity that is linked to the performance of a specific market index, such as the S&P 500. The value of the annuity will go up or down based on the performance of the index. Many indexes will contain a cap rate where there is a set maximum rate of return year over year. For example, if the index goes up by 10% but the cap on the annuity is 8%, the value of the annuity will only increase by 8%. However, if the index goes down, the principal value of the annuity is safe from losses, and instead of sustaining a market loss your value will simply not grow for that year.
FIAs will provide higher or lower returns in different years depending on how the underlying index performs, without sustaining any losses. Here is an example of how a 5 year indexed annuity linked to the S&P 500 with an 8.5% cap rate would perform for the last 5 years:
S&P 500 Return Indexed Annuity Return
2022 -18.11% 0%
2021 30.92% 8.5%
2020 18.4% 8.5%
2019 31.49% 8.5%
2018 -4.38% 0
One advantage of FIAs is that they offer the possibility of higher returns than MYGAs or fixed annuities. However, in an FIA, the rate of return is not guaranteed and will fluctuate based on the performance of the underlying index.
A multi-year guaranteed annuity (MYGA) is a type of fixed annuity that guarantees a fixed rate of return for a specific number of years, typically between 3-10 years. The rate of return is fixed at the time of purchase and will not change for the remainder of the term. MYGAs are like the insurance industry’s version of a CD. However, unlike CDs, MYGAs offer tax-deferred growth, meaning you don’t have to pay taxes on the earnings until you actually withdraw them.
MYGAs can be especially appealing for those conservative investors who prefer a contractually guaranteed stable investment. However, the rate of return on an MYGA is typically lower than what you might get with other types of investments, including FIAs.
So, what is better, an FIA or a MYGA? That ultimately depends on your goals and your risk tolerance. If you’re looking for a higher potential return and are willing to risk fluctuating returns rather than a stable, fixed return, then an FIA may be the better option. However, if you want a guaranteed rate of return and prefer a more stable investment, then a MYGA could be the better choice.
It’s important to carefully consider your options and consult with an advisor before making a decision. Both FIAs and MYGAs can be useful tools for generating conservative growth and income in retirement, but they each have their own set of features and benefits that may make one a better choice for you. It is wise to work with an advisor who can compare different carriers and products and make a recommendation based on your unique set of circumstances.
