A multi-year guaranteed annuity, or MYGA, is a fixed annuity that guarantees a fixed interest rate for a set length of time, often three to ten years. A MYGA is suited for someone approaching retirement who seeks tax deferral and investment return assurance.
How does a guaranteed annuity work?
On the investor’s contributions, fixed annuities promise to pay a guaranteed interest rate. Annuity investments grow tax-free until they are withdrawn or used as income, which usually happens during retirement. Annuity payments are taxed at ordinary rates.
How safe is a guaranteed annuity?
Are Annuities a High or Low-Risk Investment? Annuities have a low risk profile when compared to other investments such as equities and bonds. In the correct circumstances, their fixed rates and guaranteed income make them safe.
What does a guaranteed annuity pay?
After analyzing 326 annuity products from 57 insurance companies, we discovered that a $250,000 annuity will pay between $1,041 and $3,027 per month for a single lifetime and between $937 and $2,787 per month for a joint lifetime (you and your spouse). Income amounts are influenced by the age at which you purchase the annuity contract and the time you wait before taking the income.
What is better a living annuity or a guaranteed annuity?
VAN NIEKERK, RYK: Pensioners must choose between a guaranteed life annuity and a living annuity when they retire, and this is a difficult question to answer because these two alternatives are so different. Guaranteed life annuities provide a set income with annual increases, whereas living annuities provide a lot more freedom, including the amount you can remove each year. This method, however, has a higher level of risk. Jaco van Tonder, the advisor services director at Investec Asset Management, is on the line. Jaco, welcome to the show. Could you please summarize the most important benefits and drawbacks of these two types of annuities?
VAN TONDER, JACO: Thank you very much, Ryk. Yes, you are correct; the two options are vastly different, and the fact that they are so dissimilar often leaves potential retirees absolutely paralyzed when forced to choose between them.
In simple terms, the benefits of a guaranteed annuity are that everything you get is guaranteed by a large company with a strong balance sheet, so you don’t have to worry about market risk, you don’t have to worry about living longer than expected, you don’t have to worry about any of those things, you basically get a guaranteed number with a fixed increase every year. The disadvantage of a guaranteed life annuity is that it is issued by a single institution to whom you devote all of your pension assets for the next 30 years or for the rest of your life.
Entrusting one financial institution with that kind of money, and ultimately your future as a retiree, is a frightening decision for many individuals in the aftermath of the financial crisis, and understandably some people are quite concerned about making that decision. So those are the main drawbacks. There’s also the risk that if you buy a guaranteed annuity and die within the first year or two or three, you’ll lose all of your money, or at least a significant portion of it. So those are the major drawbacks.
The advantage of a living annuity is its flexibility; you have the opportunity to change your mind, so to speak, in the future, about what you invest in and how much income you collect, and that flexibility is really important. It’s also a smart idea to leave assets to beneficiaries, because when you die, your assets don’t go to an insurance company; instead, the money stays in the product, and you can name a beneficiary to get it.
The disadvantage of a living annuity is, of course, the well-known risks you face, such as investment portfolio hazards and the danger of living too long, which is a significant source of worry for many individuals in retirement. If you retire today at 60, you have the same chance of living until 75 as you have if you live until 95, and the financial challenges are considerably different if you live to 95. So, for many retirees, longevity risk is a real concern, and a living annuity won’t help you manage it.
VAN NIEKERK, RYK: So, how should a person approaching retirement approach the choice between a guaranteed and a living annuity?
VAN TONDER, JACO: It’s an intriguing subject, and many nations are increasingly opening up their retirement markets to allow consumers to buy both guaranteed annuities and living annuity-style products, according to worldwide research papers on retirement strategy. The United Kingdom, in particular, with its pension freedoms rules of 2015. So this is an area where a lot of research is being done, which is a wonderful thing, and the answers that are coming from those early research papers all appear to indicate in the direction of using both of these products for a normal retiree and trying to play to their strengths.
Try to use the guaranteed annuity to deal with longevity-related issues because it is a fantastic way to aid with longevity risk. Because of its flexibility, the living annuity is particularly useful in the early stages of retirement when your financial situation or financial requirements during retirement are uncertain. The living annuity allows you to change your mind before making a final decision later in life on how you want to deal with your income requirements.
VAN NIEKERK, RYK: But, in actuality, how does this work? Is it a 50/50 split or do you look at the total amount you’ll be paid annually or monthly?
JACO VAN TONDER: In practice, you try to modify the split depending on your income. The less income you need to draw on day one, the more you can rely on a living annuity to get you started. Unfortunately, the more income you require on day one, say around 6% or even 7%, the more you must rely on guaranteed annuities. However, if your income is somewhere in the middle, say 4% or 5% on the day you retire, you’ll have to start with a combination.
The typical strategy that has been proposed based on the research is to put the majority of your money in a living annuity-type product when you retire; you manage your income, your investments, you stay invested in equity-based investments, not a lot of fixed income because you still have a long time to go, and you go through those first 10 years of retirement when your income requirements vary a lot.
When people reach the age of 60, they frequently still have dependent children, and you never know when those children will become financially independent. People in their early 60s also have things they want to do; they still want to work part-time, and they want to do some additional traveling and leisure activities. The financial status for early retirement between the ages of 60 and 70 varies greatly among retirees. However, once you reach the age of 70, many of these issues are usually resolved, and retirees find that their financial needs stabilize, there is a lot more certainty about the future, and there is a lot more certainty about exactly what income you’ll need and how much money you’ll need for dependents.
According to research, after the first 10 years, you should start looking at allocating proportions of your living annuity assets – a few guaranteed annuities, depending on your financial situation – and then perhaps a second transfer another 10 years later if you’re lucky enough to live until you’re 80. Then there are the unique health challenges that come with it, and a lot of the research suggests that when you’re 80, you should look to move almost all of your remaining assets into a guaranteed annuity to deal with the longevity risk and eliminate all market risk, which I guess isn’t something you want if you’re in your 80s.
VAN NIEKERK, RYK: What is the procedure for converting a portion of your living annuity to a guaranteed annuity?
VAN TONDER, JACO: This is a current issue in South Africa. For historical reasons, Sars (South African Revenue Service) has had quite strict rules around moving annuities around, particularly around splitting annuities, because there is some concern that it could lead to people attempting to reduce their income tax rates – really, it’s a tax dodge loophole that could be abused. So, at the moment, Sars allows you to choose to split your pension pot across many annuities when you retire, which is a wonderful thing.
When someone retires with, say, R10 million, many pensioners and advisors will take out three or four R2.5 million living annuities. This allows you to convert each of these individual annuities into a guaranteed annuity at some point in the future. This is permitted by Sars. If you place that R10 million into a single living annuity contract, you will only be able to convert all of it to a guaranteed annuity or none of it later in life. That is the restriction in effect right now. It’s something that the industry is working on with Sars to see if we can loosen it up because the research that I mentioned earlier seems to indicate that you need to allow retirees to convert money from a living annuity to a guaranteed annuity later in life. As a result, there’s a lot of lobbying going on to see if we can get it done.
There has also been some market-driven product innovation. Some providers are currently in the process of developing a really unique alternative in which you can buy assured annuities inside your living annuity. So you take up a living annuity with one of the major providers in the market, keep it for ten years as a living annuity solely, and then, say at age 70, you may buy a guaranteed annuity as an asset in the living annuity. It’s a very creative idea, and it also solves the problem of Sars, allowing you to buy as many guaranteed annuities as you want at whatever age you want, and you can spend a portion of your retirement fund to do so. So that’s a great solution. However, it can be difficult, especially for people who retired 10 years ago and only have one annuity and want to buy a guaranteed annuity with a portion of their assets – the only solution is to hunt for one of these new style products that allow you to do so.
RYK VAN NIEKERK: Thank you, Jaco, we’ll have to leave it there. Jaco van Tonder is the director of advisor services at Investec Asset Management.
Are guaranteed annuities a good investment?
In retirement, annuities can provide a steady income stream, but if you die too young, you may not get your money’s worth. When compared to mutual funds and other investments, annuities can have hefty fees. You can tailor an annuity to meet your specific needs, but you’ll almost always have to pay more or accept a lesser monthly income.
Does Suze Orman like annuities?
Suze: Index annuities aren’t my cup of tea. These insurance-backed financial instruments are typically kept for a specified period of time and pay out based on the performance of an index such as the S&P 500.
Can you lose your money in an annuity?
Variable annuities and index-linked annuities both have the potential to lose money to their owners. An instant annuity, fixed annuity, fixed index annuity, deferred income annuity, long-term care annuity, or Medicaid annuity, on the other hand, cannot lose money.
Can you lose all your money in an annuity?
Running out of money after retirement is still a huge issue for many people, according to poll after poll. Annuities were developed to avoid this circumstance (known as superannuation) by guaranteeing your investment and providing a guaranteed lifetime income stream that you will not outlive.
In exchange, you agree to abide by certain rules, including how long you must wait to start receiving payments, how much you can withdraw each year, and whether and when you can withdraw your principal without penalty.
Annuities aren’t supposed to be high-growth investment products as much as they are designed to protect you from running out of money, but can you lose money investing in an annuity?
Let’s start with the three most prevalent types of annuities: FIXED, INDEXED, and VARIABLE. Each one has a distinct level of risk and reward potential.
Fixed Annuities:
When you invest in a fixed annuity, the insurance company promises that you will not lose your capital (the money you placed into the annuity) or any interest that has accrued.
Fixed Indexed Annuities:
When you buy a fixed indexed annuity, the insurance company ensures that you will not lose your principal, and that your gains will be locked in each year on your purchase anniversary (known as an ANNUAL RESET), which will serve as the starting point for the next year. Because the interest you earn is “locked in” each year and the index value is “reset” at the end of the year, future declines in the index will have no effect on the income you have already earned.
Variable Annuities:
Variable annuities are similar to mutual funds in that they do not safeguard your capital or investment earnings from market changes. When you buy a variable annuity, the insurance company will invest your money in mutual funds. The performance of such investments affects the value of your annuity. The value of your variable annuity will rise and fall in tandem with the performance of these investments. This means that with a variable annuity, you could lose money, even your principal, if the investments in your account don’t perform well. Variable annuities also involve greater fees, which increases the likelihood of losing money.
How much does a $200 000 annuity pay per month?
If you bought a $200,000 annuity at the age of 60 and started receiving payments right away, you’d get $876 per month for the rest of your life. If you bought a 200,000-dollar annuity at age 65 and started receiving payments right once, you would receive $958 per month for the rest of your life. If you bought a $200,000 annuity at age 70 and started receiving payments right away, you’d get about $1,042 every month for the rest of your life.
How many years does an annuity last?
A fixed-period annuity, also known as a period-certain annuity, ensures that the annuitant will receive payments for a specific period of time. Ten, fifteen, or twenty years are some of the most prevalent alternatives. (In a fixed-amount annuity, on the other hand, the annuitant chooses an amount that will be paid every month for the rest of his or her life or until the benefits are spent.)
Some plans arrange for the remaining benefits to be paid to a beneficiary specified by the annuitant if the annuitant dies before payments commence. Depending on the plan, this feature applies if the whole period has not yet passed or if there is a balance on the account at the time of death.
However, unless the plan allows for the continuation of benefits, if the annuitant lives beyond the stipulated period or the account is depleted before death, no additional payments are assured. In this situation, payments will be made to the beneficiary until the predetermined period has passed or the account balance has reached zero.
What is better than an annuity for retirement?
IRAs are investment vehicles that are funded by mutual funds, equities, and bonds. Annuities are retirement savings plans that are either investment-based or insurance-based.
IRAs can have more upside growth potential than most annuities, but they normally do not provide the same level of protection against stock market losses as most annuities.
The only feature of annuities that IRAs lack is the ability to transform retirement savings into a guaranteed income stream that cannot be outlived.
The IRS sets annual limits on contributions to IRAs and Roth IRAs. For example, in 2020, a person under the age of 50 can contribute up to $6,000 per year, whereas someone above the age of 50 can contribute up to $7,000 per year. There are no restrictions on how much money can be put into a nonqualified deferred annuity each year.
With IRAs, withdrawals must be made by the age of 72 to meet the IRS’s required minimum distributions. With a nonqualified deferred annuity, there are no restrictions on when you can take money out of the account.
Withdrawals from annuities and most IRAs are taxed as ordinary income and, if taken before the age of 59.5, are subject to early withdrawal penalties. The Roth IRA or Roth IRA Annuity is an exception.
