Most people are familiar with the idea of splitting their portfolios between stocks and bonds. But those are not the only investment options out there. And right now, with rates so low that only the riskiest bonds offer any yield, and with stock prices near all-time highs, you should know about some alternative ways to get a decent return without taking a huge amount of risk.
One of the best alternatives out there today is a multi-year guaranteed annuity or MYGA. You may not have ever seen or heard of these because they’re not offered by traditional money managers–they’re offered by life insurance companies.
It makes sense for life insurance companies to offer these because they are regularly collecting premiums from their normal life insurance customers. That’s why they can guarantee these annuities to you because they are being supported on the back-end by life insurance premiums from those other customers. Think about it–guaranteed! The bond market can’t promise that. A bond also works differently and fluctuates in value until maturity. And unless it’s a municipal bond or held in a tax-deferred or tax-free account, you’ll have to pay applicable taxes on it.
Now, there are lifetime guaranteed annuities, but those are a better fit for older people who are concerned about outliving their retirement savings. For younger people, there are multi-year guaranteed annuities, which have a fixed period of, say, five or seven years. The rate you can get on these might surprise you–I just put one of my clients in a seven-year MYGA yielding 3.25% a year. Compare that with the seven-year U.S. Treasury yield, which as I write this is below 0.5%. Or seven-year CDs (bank certificates of deposit), which only offer around 1.1%.
This approach is ideal for those who don’t need or want the return paid out into their bank account each year. After all, if you collect the interest, you’ll have to pay taxes on it. Instead, the MYGA pays out your full return at the contract’s maturity. But wait–if you don’t need it at that point, and want to avoid a big tax bill, you can rollover into another MYGA. You can keep doing this until you need the money, or are in a lower tax bracket; whatever works for you.
It will be challenging for insurers to keep offering such decent yields as the prospect of ultra-low rates for a long time looms before us. But it’s a great alternative to traditional portfolio management, and one you ought to know about.