FINANCE

A LONG STORY

Today’s high interest rates suggest it’s smart to lock them up for the long term. Fixed-rate annuities can give you a high set rate for up to 10 years. Laddering annuities provides flexibility.

KEN NUSS

Sometimes what looks like an unbeatable deal isn’t really.

Rates on short-term bank certificates of deposit are far higher than they’ve been in many years. Now you can get about 5.50% or more on a CD that matures in a year or sooner. You’ll earn a good guaranteed rate and won’t have to tie up your money very long.

A great deal? It’s certainly a much better deal than you could get on a CD a year or two ago. But there are some good reasons not to take it. Or at least not sink too much of your investable assets into a short-term CD.

Here’s why. When a 12-month CD matures, you may be able to renew it at a similar rate. But there are no guarantees, and history suggests that CD rates a year hence are likely to be at least a bit lower and possibly a lot lower.

When interest rates were very low, it made sense to stay with shorter-term CDs and annuities because the odds were good that rates would be up in the future. But that’s no longer the case.

Reducing the risk of
lower rates in the future
Today you can reduce the risk of lower future interest rates by locking up your money longer. For example, longer-term CDs pay less than short-term CDs but still offer decent rates. NerdWallet, for example, in early November, showed one bank offering 4.75% for either a four- or five-year CD.
Not bad, but you can do better with a type of fixed-rate annuity called a multi-year guarantee annuity.

A MYGA acts much like a CD, guaranteeing a set rate for a term. Unlike a CD, all interest earned in a nonqualified annuity is tax-deferred until withdrawn. MYGAs are particularly appropriate for people in their mid-50s or older because there are tax penalties for taking interest out before age 59½.

MYGAs are paying higher interest rates than they have in more than a decade, and longer-term rates are especially appealing right now. This table of annuity rates offers a quick way to scan rates. As of early/mid-November 2023, you can find an annuity that pays 6.15% for either a five- or seven-year term. You can also find a 10-year annuity paying 6.00 percent. Also available is a three-year annuity guaranteeing 5.90% annually.

These rates are guaranteed for the term, even if interest rates decline. You won’t have to worry about having your rate slashed a year or two from now.

Ladder MYGAs to lock in
long-term rates
If you have enough money to spread it among two or more annuities, consider “laddering” guarantee terms. Spreading your money among annuities of different terms gives you both good current income and future flexibility.

In the past, I’ve recommended laddering annuities from three to five years because you wouldn’t earn much more with a longer-term annuity. Today, I still recommend laddering, but instead use MYGAs with terms from five to 10 years.

That’s because today’s opportunity to lock in high rates won’t last. If you purchase a two- or three-year product, rates are likely to be lower when the term is up.

Many people are understandably wary of tying up their money that long. Of course, if for whatever reason you don’t feel comfortable committing to doing that, a three-year MYGA is still very attractive at today’s rates.

Consider, however, that most annuities offer some liquidity. Provisions vary, but many let you take out up to 10% of the value annually without penalty. (If you take out more than the allowed amount, the insurer will levy a surrender charge.) So, if you are concerned about needing some of your money before the term is up, choose an annuity with liberal withdrawal rules.

MYGAs also work well as IRAs
and Roth IRAs
Besides offering tax advantages for non-qualified savings, MYGAs also work well for IRAs and Roth IRAs. And the same laddering approach works too.

You must begin taking required minimum distributions (RMDs) from a standard IRA at age 72 (or 73 if you reach age 72 after Dec. 31, 2022). Look for an IRA MYGA that lets you take out your RMDs without penalty. Many do.

Roth IRAs don’t require RMDs and withdrawals are tax-free. A MYGA paying, say, 6.00%, will steadily grow in value if you let it compound within a Roth IRA.

No one has a crystal ball about the future direction of interest rates. It is virtually certain interest rates will decline eventually. But no one knows when it will happen and how quickly and how much rates will decline.

The best we can do is look at history. Today, history suggests that it’s a good time to consider purchasing longer-term annuities—assuming that you’re willing and able to tie up some of your savings in exchange for an attractive guaranteed long-term interest rate. Whenever considering an annuity, get the company’s A.M. Best rating, which can help you judge its financial staying power.