MYGAs vs CDs

[Justin Bilyj]

I wanted to start a conversation on the various benefits of owning either over the other. I thought I knew the differences, but when I started digging - I found out that there might not be many differences aside from FDIC vs Reinsurance Pools and higher rates with MYGAs on average.

Appreciate the discussion!

 

[DHK]

You can annuitize an annuity for lifetime income. Can't do that with a CD.

CD interest is taxable (well, sort of. Rates are so low, there's not much to tax).

 

[Justin Bilyj]

You can annuitize an annuity for lifetime income. Can't do that with a CD.

CD interest is taxable (well, sort of. Rates are so low, there's not much to tax).

I've seen those graphs all around - many of the benefits a MYGA holds, can be matched by a CD in a ROTH account though no? What's really left then?

 

[Tahoe Ray]

I've seen those graphs all around - many of the benefits a MYGA holds, can be matched by a CD in a ROTH account though no? What's really left then?

Most MYGA buyers won't qualify for a Roth because they make too much or are retired.

You're also not going to find CDs with rates as high (of course MYGAs carry more risk)

The biggest sellers of MYGAs are normally the banks if that tells you anything.

 

[DHK]

I'll give you a different perspective: insurance agents are (should be) more skilled in giving advice than personal bankers. When I was at the bank as an unlicensed banker... I knew next to nothing about IRAs. If someone asked to open an IRA, I just asked what they wanted and did it. There was no advice given at all whatsoever. Nor would there be any accountability for that lack of advice either, particularly because there was no licensing to speak of.

BTW, opening a fixed annuity at a bank... has very little additional advice than "do you want a higher rate? Let me show you something else." At least the agent would be accountable for their sale.

 

[Stephen]

When I have a client or prospect that is over allocated in CD's I will draw something like this on the whiteboard:

Checking - Savings - CDs - Fixed Account (annuities) - Stocks/Bonds/Mutual Funds

And have a discussion about each assets purpose in their life , as well as the pros and cons of each.

The checking account is for paying bills. The savings account is for the new roof, the new transmission , or the busted pipe. Having these accounts adequately funded gives peace of mind , and allows us to save on insurance premiums by carrying higher deductibles. We aren't making much if anything in these accounts , but we can reach out and grab our money any time that we want.

CD's can be good back up emergency fund. Better (but not much) returns than a savings account , better liquidity than an annuity , and no market risk.

MYGA's or FIAs can both play an important role in the portfolio: Better returns than CDs , and a place to set aside money when income planning for a bear market (using 10% free withdrawals). Not as liquid as the fore-mentioned accounts , that is why it is important to have those accounts properly funded first.

Stocks/Mutual Funds: 100% liquidity in retirement with better returns than the previously mentioned accounts. Of course there is downside risk that can be reduced by owning a MYGA/FIA to draw from in a bear market.

 

[jboussea]

liquidity vs Return

The more liquid the assets, the less it will return you and vice versa..

 

[Justin Bilyj]

liquidity vs Return

The more liquid the assets, the less it will return you and vice versa..

But there's no CDs with 10% free withdrawals like some MYGAs - so wouldnt that mean the annuity has more liquidity then?

 

[DHK]

Yes and no.

If you don't want to give up the rate of the CD, then the annuity would be more liquid with the 10% of the annual value free withdrawal amount.

However, if you don't mind just giving up the interest you would have earned (which wouldn't be much compared to an appropriate annuity), you'd get 100% of your CD principal back, and in the same day you visit your bank branch. Comparing to an annuity, to liquidate 100% DURING a surrender charge period, the 1st 10% would be free of surrender charge, and the remaining would be charged based on the year of liquidation.

 

[Stephen]

If it is my money (or the money of someone that pays me to tell me what to do with their money) and we own a CD at all , it isn't going to be longer in duration than 1 year.

But , I am not worried about each products liquidity as I am worried about our liquidity. In retirement if I have $100k in a 1 year CD , $100k in a 5 year annuity , and $100k in an IRA, then that means that I have access to $100k Now, and access to $210k next year.

If a repeat of 2008 happens and the $100k in the IRA turns into $50k, then we stop drawing from that account and put it on temporary "lockdown" . That means that we need to have enough in checking, savings, or insurance cash value to to make it the next 12 months until the CD matures and we can take free withdrawals from the annuity.

So again , for my process , it all starts and flows from living expenses and checking account needs.

But there's no CDs with 10% free withdrawals like some MYGAs - so wouldn't that mean the annuity has more liquidity then?

To answer your excellent and witty question , yes if both the CD and annuity are the same duration then you would have more liquidity in the annuity.