Selecting a Multi-Year Guaranteed Annuity (MYGA) can be a wise strategy for individuals looking to secure a fixed interest rate over a set period. With guaranteed returns and tax-deferred growth, MYGAs provide stability in uncertain market conditions. However, as with any financial product, there are several important factors to consider before making a commitment. Overlooking potential pitfalls can lead to unexpected costs or constraints that diminish the overall benefit of the investment.
To help you make an informed decision, it’s essential to be aware of the common mistakes that many individuals encounter when selecting a MYGA. From understanding the full scope of fees and withdrawal limitations to evaluating the right term length for your financial goals, these missteps can easily be avoided with proper knowledge. In this article, we’ll explore five key areas where careful attention is necessary to ensure that you select the MYGA that best fits your needs and goals.
Not Understanding the Fees and Costs
One of the most common mistakes when selecting a MYGA is not fully understanding the fees and costs associated with the product. While MYGAs are often touted for their simplicity, there can be hidden or poorly explained charges that eat into your returns. Common fees include administrative fees, annual maintenance fees, and charges for any additional riders. Failing to account for these costs can lead to disappointment when your returns fall short of expectations. For a deeper understanding of potential fees and how to avoid them, refer to our previous post on “MYGAs vs. CDs: Which is the Better Option for Your Savings?”
To avoid this mistake, it’s important to carefully review the contract and ask for a clear breakdown of all associated fees. Some MYGAs may appear attractive on the surface due to higher interest rates, but those benefits can be outweighed by excessive fees. Being aware of the total cost structure ensures that you’re making an informed decision and maximizing the value of your investment.
Ignoring Withdrawal Limitations
Another common pitfall when selecting a MYGA is failing to consider the limitations on withdrawals. Many MYGAs come with strict restrictions on when and how much money you can access during the term of the annuity. Typically, most MYGAs allow for penalty-free withdrawals up to a certain limit (often around 10% of the contract value annually), but anything beyond that is usually subject to significant penalties. If you need more liquidity than the MYGA allows, this can lead to unexpected costs or financial strain. According to a 2023 report by LIMRA, 47% of annuity owners indicated that liquidity was one of the most important features when considering an annuity, highlighting the need to balance guarantees with flexibility (LIMRA, 2023).
Understanding these withdrawal rules is crucial to ensuring the MYGA aligns with your overall financial goals. Before making a decision, it’s essential to evaluate your liquidity needs and determine whether the MYGA you are considering offers enough flexibility. Failing to do so may leave you in a position where accessing your money comes with costly penalties. For a more detailed look into how withdrawal restrictions can impact annuity choices, see our post “Navigating Withdrawal Options in Fixed Annuities,” which offers further insights into how to avoid this mistake.
Source:
LIMRA (2023). Annuity Ownership Trends: Liquidity and Access [Data Report]. Retrieved from https://www.LIMRA.org
Overlooking Surrender Charges
Surrender charges are one of the most overlooked aspects when selecting a MYGA. These charges apply if you withdraw more than the penalty-free amount or surrender your contract entirely before the end of the term. The charges can be quite significant, especially in the early years of the contract, with some products imposing fees as high as 10% of the contract value. Ignoring this aspect can lead to a costly mistake, particularly if you find yourself needing access to funds earlier than expected.
It’s important to review the surrender schedule for any MYGA you’re considering, as the length and severity of the charges can vary widely between providers. For example, some MYGAs have a “declining surrender charge” where the percentage decreases over time, while others maintain a higher fee structure for longer periods. Knowing these details can help you select a product that best fits your financial timeline and needs. Make sure to read the fine print and fully understand how surrender charges could affect your ability to access your funds.
Choosing a Term Length That Doesn’t Match Financial Goals
One of the key mistakes investors make when selecting a MYGA is choosing a term length that doesn’t align with their financial goals. MYGAs are designed to lock in a fixed interest rate over a specific period, often ranging from 3 to 10 years. Selecting a term that is too short may leave you with reinvestment risk if rates decline, while a term that’s too long could restrict access to your money when you need it most. According to a 2022 survey by NAFA, 62% of annuity owners reported that selecting the right term length was one of the most critical factors when choosing an annuity, indicating the importance of aligning the contract with personal financial timelines (NAFA, 2022).
When choosing the right MYGA, it’s essential to evaluate your future financial needs. Ask yourself: will you need to access these funds within the next few years, or are you comfortable locking them away for a longer period? Misjudging the term length can result in unnecessary penalties if you need to withdraw early or leave you exposed to a lower interest rate environment when your contract expires. Careful planning and understanding your financial objectives will help you avoid this common mistake.
Source:
NAFA (2022). Annuity Ownership Survey: Importance of Term Length [Survey Results]. Retrieved from https://www.NAFA.com
Not Considering Inflation Impact
A common mistake when selecting a MYGA is failing to account for the potential impact of inflation. Since MYGAs offer a fixed interest rate for the duration of the term, the purchasing power of your money may diminish over time if inflation rises. While MYGAs provide stability, locking in a rate for several years means you could be left with a lower real return, particularly during periods of high inflation. This is especially important to consider for long-term MYGAs, where inflation risk can erode the value of your investment over time.
To mitigate this risk, it’s crucial to balance the benefits of a fixed rate with the reality of inflation. If you are concerned about inflation outpacing your returns, consider diversifying your investments or opting for shorter-term MYGAs that provide more flexibility to reinvest in higher-rate environments. While MYGAs are an excellent choice for security and guaranteed returns, overlooking inflation can lead to diminished purchasing power and a lower overall return in the long run.
Key Takeaways for Avoiding Common MYGA Selection Mistakes
When selecting a Multi-Year Guaranteed Annuity (MYGA), understanding the potential pitfalls can make all the difference in maximizing the benefits of your investment. By being aware of key areas such as fees, withdrawal limitations, and surrender charges, you can avoid costly surprises down the road. Additionally, it’s essential to choose a term length that aligns with your financial goals and take into account the long-term effects of inflation. These common mistakes often stem from a lack of careful planning or knowledge, but they can be easily avoided with the right approach.
Ultimately, a well-chosen MYGA can offer valuable stability and guaranteed growth, but only if you make informed decisions along the way. By reviewing the fee structures, understanding withdrawal limits, and ensuring the product fits your financial timeline, you can protect your investment and avoid unnecessary charges. Remember, the best MYGA for you will not only offer competitive rates but also align with your overall financial objectives and provide flexibility to manage both present and future needs.
