LETS TALK ABOUT LADDERS
Creating a bond ladder has been a strategy that investors have used over the past decades to help protect against interest rate risk and increase liquidity in their portfolio. Today, many investors are looking for higher guaranteed rates but could be concerned that locking in their money today could potentially hurt them if future rates rise. This is a very real concern due to today’s volatile interest rate environment.
By replacing bonds in a ladder with Multi-Year Guaranteed Annuities or MYGAs, investors can receive competitive returns, guaranteed rates of returns, principal protection, and tax-deferral. Through our worksheet, Laddering MYGAs, we demonstrate how purchasing 3 differing durations of MYGAs, can help add positive contract growth while allowing liquidity in future years.
To build a ladder we begin by splitting a lump sum of $100,000 into 3 durations of MYGAs. In this scenario the MYGA rates and durations of 2% of 3 years, 2.25% for 5 years, and 2.50% for 7 years.
By splitting the principal equally, the annuity ladder owner will receive 3 different rates and 3 different maturity dates.
At the end of 3 years, if interest rates have increased, the client will be able to reinvest that portion of their portfolio into another maturity which would allow them to earn higher rates of return on their reinvestment.
Walking through the scenario of rates rising on 3-year MYGA to 2.50%:
Original 3-year MYGA value at maturity: $35,373.25
New First Year Growth at 2.5% = $884.33
Total annual growth of MYGA Ladder = $2467
Conversely, if interest rates have decreased, the annuity ladder owner will still have the majority of their assets earning higher interest than prevailing market rates.
Walking through the scenario of rates decreasing on 3-year MYGA to 1.00%:
Original 3-year MYGA value at maturity: $35,373.25
New First Year Growth at 1.50% = $530.59
Total annual growth of MYGA Ladder = $2113 a difference of $354, while the majority of the ladder is receiving guaranteed rates higher than the prevailing rates at this time.
Either way, we look at it, it’s a positive result for your client and a good decision in an uncertain market.
This is not a comprehensive overview of all the relevant features and benefits of multi-year guaranteed annuities. Before deciding to purchase a particular product, be sure to review all of the material details about the product and discuss the suitability of the product for your financial planning purposes with a qualified financial professional.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are designed to meet long-term needs of retirement income. Annuity contracts typically require money being left in the annuity for a specified period, usually referred to as the surrender charge period. If you fully surrender your annuity contract at any time, guaranteed payments provided for in the contract and/or any rider will typically no longer be in force, and you will receive your contract’s cash surrender value. Early withdrawal charges will apply if money is withdrawn during the early withdrawal charge period. Purchasing an annuity inside a qualified plan (retirement plan) that provides a tax deferral under the Internal Revenue Code provides no additional tax benefits. An annuity used to fund a tax qualified retirement plan should be selected based on features other than tax deferral. All of the annuity’s features risks, limitations, and costs should be considered before purchasing an annuity inside a qualified retirement plan. This is not a comprehensive overview of all the relevant features and benefits of either bank CDs or multi-year guaranteed annuities. Before deciding to purchase a particular product, be sure to review all of the material details about the product and discuss the suitability of the product for your financial planning purposes with a qualified financial professional.
Not FDIC insured • May lose value • No bank or credit union guarantee • Not a deposit • Not insured by any federal government