MYGA versus Indexed Annuities in Simple Terms

This is really the main decision with annuities and there's so much confusion around the two primary types of annuities.

We're skipping over variable annuities since they're really expensive for what you're trying to do with the results (match stocks which is impossible).

For pure annuity exposure, it's really about MYGAs or Indexed annuities in today's world.

The problem is that everything you see will be based on the past and that past is out of the ordinary (hello...covid??) that it's pretty much useless.

Don't get bamboozled with sales pitches. It's important to understand the good, bad, and ugly so you can make a good decision and that decision starts between these two models.

We'll dive deeper but first, our credentials from real people:

This is what we'll cover:

• Quick intro to MYGAs and Indexed annuities
• How to compare MYGAs and Indexed annuities
• Past and Future performance - the Three Oracles of Annuities
• How to shop and compare MYGAs and Indexed annuities

Let's get started.

Quick intro to MYGAs and Indexed annuities

We have a big review on What annuities are in simple terms but lets's focus on the two dominant options.

First, the purest form of annuity...MYGAs.

MYGA is short for "Multi-Year Guaranteed Annuity".

It's the simplest form in that it will pay a defined and fixed rate (think interest rate) to you for a defined and fixed period of time!

For example, you may get a MYGA that will pay 5% interest annually for 7 years.

There are generally no fees for this type of annuity unless other bells and whistles are added and it usually doesn't make sense since you'll end up paying for those with additional costs.

This type of annuity is great if you have a lump of money (or even stream of extra money) that you want to generate income over time without any downside.

That time could start right away or later on (at higher rates since you waited).

You're agreeing to lock in this money for a period of time and outside of free withdrawals (generally 5-10% annually), there are surrender charges or penalties for taking the money out early.

So, why look any further? Hello Indexed annuities.

Indexed annuities are a much newer version of the product that aims to perform better than MYGAs.

We use the term "aim" because it's not guaranteed!

Essentially, an indexed annuity will allow you to share in upside tied to an index such as the S&P (stock index..most popular option).

If the index goes up, the index annuity will pay out an increased interest amount to you at regular intervals.

You never get full pop!

Meaning, if the S&P goes up 10% in a year, you might get 6% depending on how it's structured.

There are various means to curtail how much of the full increase you get including:

• Participation rates - what % of the increase will you get
• Caps - what's the max amount you will get if the index goes up
• Spreads - reduces the gains by a certain amount

This is where things get confusing but keep in mind that annuities are commodities...there are "no loss" leaders in the market!

If a plan is richer in one aspect, it's going to be worse in another.

"It all settles out in the wash"!

The offset to this "capped gain" is that in a down year or period (usually a year) for the underlying index, our interest will likely be zero depending on the product.

You read that right...your principal will be protected from loss if the market goes down!

Sure, they will perform differently (as told by past performance) but that speaks more to the underlying index performance.

For example, if you were tied to the Nasdaq where tech dominates (think the Magnificent 7 like Nvidia, etc) over the past, your results would be much better!

The problem is that no one has a crystal ball AND we're at record highs in stocks as we speak. Hard to duplicate that.

That speaks to our next section...how do we really compare these two options against each other?

How to compare MYGAs and Indexed annuities

So...first, think about you and risk.

How do you handle it? If you've owned stocks or bonds, how were you when they went down? 5%. 10%?

Did you panic. Sell sell sell?

Also, how consistent do you need the payments to be and how long do you have before you need the money.

For example, if you need to plug in holes that Social Security and other income isn't addressing, you may need a steady amount (even if lower) coming in every month.

Really think through your financial situation in terms of income and expenses. We can help with this at no cost to you.

MYGAs are steady as she goes. You know what you'll receive every month.

Now...if you don't really need the income right away or as steady, the index annuities may allow you to get higher payments over a longer period of time.

The time element is critical since you may buy an index annuity (or stocks or bonds) right before a major crash!

• MYGAs will pay regardlessly.
• Index annuities may generate zero income during down periods.

Over a long enough duration (think 5-7 years), the index annuities should perform better but we'll discuss in the last section how to go in with more accurate expectations.

There are index annuities out there that show gains of double digits but that's like finding a needle in the haystack. If you're that good, just go pick stocks!

Exactly. Easier said than done and generally speaking, the best performing index annuity will probably not reproduce those results.

Our experience for right now probably points to 5%ish for MYGAs and maybe 1-2% higher on average for indexed annuities over a window (5-7 years).

If you get lucky, great! It's best to look at the worst years to make a better decision. Don't get "sold" by hucksters out there.

Let's talk about what might drive your decision beyond need for consistent (albeit lower) payments.

Past and Future performance - the Three Oracles of Annuities

What affects the overall performance of both MYGAs and Index funds?

We like to speak about the Three Oracles of Annuities:

• 10 Year Treasury Rate
• ISM business cycle
• Worldwide liquidity

We won't go too far into the weeds but it's important to strategize a bit and we'll show you options to do this.

10 Year Treasury Rate

First, MYGAs and even Index annuities are directly affected by the "cost of money".

After all, they are contracts that pay interest. The Index annuities use that interest and buy call options on the index. If the index goes up, those call options gain in value and you get a share of that.

The bellwether of the cost of money is the 10-year treasury as an instrument and really, inflation is driving that.

Right now (Feb 2025), 10-year treasuries are skimming all-time lows as interest rates hover at generationally higher levels.

If interest rates go up (inverse to 10-year treasuries), the amount that MYGAs pay out will also go up.

Index annuities are more complicated. Yes, interest allows for the purchase of more call options on the index (S&P for example) but higher interest rates are generally not great for stocks!

ISM Business Cycle

This gets a little more into the weeds but the 10-year treasury, interest rates, and inflation are driven by business cycles of expansion and correction.

When the economy cools, interest rates should come down and annuities will pay less if started then.

Flip side for when expansion happens.

You can check out worldwide or US ISM patterns as it's remarkably consistent outside of the craziness around covid.

This directly drives another key aspect...

Worldwide liquidity

Ever since the great financial crisis, there's been a rolling ebb and flow of the amount of money sloshing around in our financial system. Think leverage and debt both from the central banks and even generally speaking.

More liquidity (when the economy is cooling) means more potential gains in markets which drives those indexes that Indexed annuities are tied to.

Okay...so you may be asking...aren't we just trying to time the market again albeit through annuities now?

Good point but we can at least have an educated guess and structure our annuity purchases accordingly. Let's look at that now.

How to shop and compare MYGAs and Indexed annuities

First, we believe in providing you access to all the annuities out there to make a good decision free and fast here:

Beware any agent/carrier that's only showing 1-2 products or even carriers.

The top paying MYGA from A-rated carriers changes weekly if not daily!

Once you buy a MYGA, you lock in that rate for the period.

So...here are three strategies to address everything above as best as we're able:

Hybrid Annuities

There are some interesting products now that will offer a fixed minimum rate (such as 4%) OR the share of an index (think 60% of the S&P); whichever is greater.

As a purchaser of annuities myself, this will be part of my mix since we have so much conflicting info from the "Oracles" above.

Happy to run those numbers for you.

Otherwise, think diversify! Win regardless of the outcome.

You can Straddle and Layer annuities.

Straddle means that you split your money into different baskets.

• Maybe 50% MYGA (for a defined income) and 50% Index (with hope of sharing market growth)
• With an Indexed annuity, most allow you to pick different options combined such as part S&P and part Gold or Bonds.

Finally, you can Layer annuity purchases.

Don't try to time the market but spread purchases across a range of durations and types.

• 25% in 5-year MYGA
• 25% in 6-year INDEX
• 25% in 7-year MYGA
• 25% in 8-year INDEX

After 5 years, you can take the MYGA and either purchase another one (because interest rates end up higher...inflation won!) or you can roll into an index annuity (rates are down and stocks should do well).

Every year, there's a rolling amount to redistribute.

This way, you're covered either way and you're not constantly fretting over making the wrong decision.

We call this a LIC or Layered Income Cake. Not condoning eating continuous cake but not a bad way to go out!

The durations above can all be adjusted to your when you need the money (or don't). On average, you get paid more with longer durations but it also means you can't adjust as quickly.

Alright. That's a wrap and we covered a 70-80% of the differences but reach out to us with the remaining questions specific to your situation.

Hopefully, this has made it easier for you to really understand practically how to compare MYGAs and Index annuities.

We left out Variable annuities (expensive for increased share of market with potential loss of principle) and RYLAs (most aggressive form of indexing but again, expensive in our books).

We just answer questions all day and if we're helpful, hope you work with us since there's no cost for our assistance.

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