Banks, Poor Cash Rates and an Alternate Solution
While many of the people we see are younger and wanting to get an informed head start in their financial life, the bulk of those coming to see us are either retired or within 5-10 years of doing so. Most of the latter know that they will be on a fixed income to some extent during retirement. The question for them and many others is how to best utilize all areas of their plan, including cash, to meet their income needs. This article will look at a financial tool that can be used to increase their income despite an election year and even a recession.
A quick search of bank interest rates across the country can leave retirees on a fixed income feeling overwhelmed and a little discouraged. On average, most banks are offering roughly 0.07% on checking accounts, 0.42% on savings accounts and only 0.61% on money market accounts (Source: FDIC National Averages). Even if a retired couple had $1,000,000 to put into a money market account, they would still only be getting roughly $6,100 back on that large deposit annually. There’s an old saying, “Don’t be penny-wise and pound-foolish”. Interest rates that are not competitive are really bad news when you consider inflation that often accompanies recessions, potential tax increases, the uncertainty of an election year, and volatile markets.
Enter The MYGA
With banks offering a pittance on most checking, savings, and money market accounts, it’s important to consider other options. One such tool that most people have never heard of, let alone considered using to build their own wealth, is the MYGA. It is a financial instrument many retirees on a fixed income should familiarize themselves with. The Multi-Year Guaranteed Annuity (MYGA for short) is unique from other accounts. It offers a fixed percentage back on the money parked there over a contractually agreed term (similar to a bank CD but typically at better rates) and many MYGA carriers (insurance companies) have some level of penalty free access to funds built into their contracts. It is also a tax-deferred instrument if you’re not pulling income and allowing your funds to compound interest. Recent MYGA rates have offered returns of up to 5.6% for up to 5 years. This increase in interest on idle cash can be life-changing for individuals on a fixed income. Let’s take a look at that same $1,000,000 investment parked in a money market account offering 0.61% vs. a Multi-Year Guaranteed Annuity.
Couple A: If this couple placed their $1,000,000 savings into a money market account at the current average at 0.61%, they would get back roughly $6,100 per year. They would have made $30,500 on their money at the end of five years assuming they spent the $6,100 annually and not compounded the interest earned.
Couple B: If this couple placed their $1,000,000 savings into a MYGA at the current 5.6% rate, they would get back roughly $56,000 per year. At the end of the same five year period, they would have made $280,000 on their money, assuming all of the same variables as Couple A.
It is easy to see how quickly the power of interest can impact a retiree’s lifestyle, both positively and negatively.
Why A MYGA Could Be A Great Option
Aside from possibly better rates and growth, MYGA’s can offer some tax planning flexibility as well. Need the income annually? Simply pull the interest and pay the taxes. Want to defer taxes, allow compounding of interest and pull income later? You can do that too.
What about liquidity? What if I need more than my interest earned? As mentioned earlier, many of these carriers allow access up to 10% of the accumulation value of the contract. So, on a $1,000,000 MYGA, you could access up to $100,000 without penalty. Also, while a MYGA does not have to be annuitized (you give up ownership of the asset in exchange for a guaranteed income stream) to produce income, it could be at some point if a planning situation warranted it.
The key is to optimize your earning and income capability on all assets while maintaining some level of planning flexibility across your asset base. We have used the MYGA solution with many of our clients and believe this is best utilized by doing retirement planning that takes into account the Five Puzzling areas of retirement…Taxes, Income, Investments, Estate and Insurance. Coordinate those areas and you’re off to a good start. Your planning situation is unique to you, so your plan and advice should be as well.
I hope this is helpful to your retirement journey. Call us, come see us or visit us at www.woottonfinancial.com, we’d love the opportunity to help address your questions and concerns and provide you Clear Direction for Your Retirement®.
Investment Advisory services offered through Game Plan Advisors, Inc., a registered investment advisor. Insurance services offered through Wootton Financial Group, Inc. Game Plan Advisors, Inc. and Wootton Financial Group, Inc. are affiliated through common ownership. Neither Game Plan Advisors, Inc. nor Wootton Financial Group, Inc. offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Not associated with or endorsed by the Social Security Administration or any other government agency.
Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first 5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.