MYGA to SPIA for Deferred Income
There’s a strategy for retirement income that I can honestly say was the main motivation for starting this website. It was nearly 20 years ago that I started crunching numbers to see if guaranteed lifetime withdrawal benefits (GLWB) were really as valuable as the marketing experts claimed. My first exposure to those riders was with variable annuities, which came with steep fees and market risk. From the beginning it has always been available with Fixed Indexed Annuities (FIA) as well. The GLWB gave the contract owner guaranteed income in the future, regardless of account performance. The income guarantee convinced several consumers to ignore the market risk and the good companies were able to manage it well.
But, what if you didn’t want to pay the fee?
Remember that early in my career I only sold fixed annuities with multi-year interest rate guarantees (MYGA). It’s an incredibly simple and safe contract with no fees whatsoever. At the time, single premium immediate annuities (SPIA) were, and in many cases still are, the absolute best for maximum income, but income payments must start within the first year of the contract. If a person wanted to defer income for several years, the GLWB was the only thing available in those days. There was another way to defer income without fees but everybody I showed thought I was crazy.
Let’s say you wanted to defer income for five years. Use the GLWB quote as a benchmark to see if there’s a way to get more income. The idea was to instead use a five year MYGA and simply grow the money for five years. When the surrender charge period was over you could switch to a SPIA and maximize income with a larger amount of guaranteed money. We could approximate the SPIA by running a quote in the beginning with an assumption that the person was five years older at the time. We would often be able to project future income that was 20% or more higher than a GLWB. Unfortunately a projection is not a guarantee but I’ll get to that later.
It’s a good thing that I wasn’t very adept at marketing back then. Sure, everyone who bought MYGAs from me did well but no one took it seriously as an income strategy. I’m glad because after about 2009 interest rates were really low and SPIAs wouldn’t have paid anything close to what was projected in the beginning. GLWBs would have done better and many variable annuities had solid performance so the income payments stepped up even higher than the initial guarantee. You have to be careful if you employ this strategy. It will give you more control over the money before you take income but it’s risky.
It did work for people in the mid-2010s who are just now starting to roll contracts into guaranteed income deals. It made more sense when rates were actually low because they had nowhere else to go. My youthful exuberance didn’t do me any favors in 2005 when I had no experience to consider all possibilities. Now we have some seriously good interest potential in both MYGAs and GLWBs. So much so that I consider both options for everyone that looks into deferred income. If I’m going to make a recommendation then it’s solid from every angle you can imagine.
Last week a scenario came to me that was similar to something I’ve seen a few dozen times in the past couple years. All these people wanted deferred income so I ran through my process and delivered the top results. In all cases a GLWB with a fixed indexed annuity was the best deferred income quote available. These cases were different because someone else had told them that using a MYGA for the deferral period and then switching to a SPIA for income would be the best way to go. It’s as if I hadn’t already considered that. It’s so rudimentary to me that of course I had considered it and that’s why I recommended what I did.
The most recent case went like this… a 59 year old woman wanted to secure $2000 per month income in seven years. Using a solve function in the database, I determined that it would cost here about $200K to do it. That was the best quote. Then she said, “what if I use a MYGA for seven years and then buy a SPIA?” Someone else had given her that idea and through that I learned that she was only looking for a second opinion by talking to me. So I showed her the numbers. MYGA for seven years then buy a SPIA. We’d have to assume she was seven years older to quote the SPIA numbers but we could use a higher starting value.
Using a top-rated MYGA and then assuming she was seven years older when the SPIA would be purchased, the higher purchase amount resulted in only $1750 of monthly income. That’s a 12.5% reduction in income benefit! Then you also need to understand the risk you run if that’s the path you take. In order for the MYGA to SPIA to match then you will have to gamble on a significant rate increase in the next seven years. If it doesn’t work out then it costs you a fair bit of money in terms of retirement income. I’m in the business of maximizing income so that risk is a nonstarter for me.
There are people out there touting MYGA to SPIA as the best way to maximize income and I’ll admit that in the rare case it works. Hell, if markets switch then it might work again but the spread is not there right now. There are lots of reasons to forego guaranteed lifetime income but using an alternative strategy to game the system will not usually get you ahead. It may get appointments with some advisors but you are wasting your time if you think it’s going to get better results.
There are plenty of ways that MYGAs can be used for retirement income. Preserving options, maintaining control or adjusting payouts are all benefits of doing it. But maximizing deferred income is not something that works with the numbers right now. If anything you see above is contradictory to the volumes of content I’ve shared in the past several years then please let me know. I may not have been the first to come up with this but I did come up with it on my own.
Get a hold of me if you think someone else is taking you down the wrong path.
Bryan
Podcast Episode: MYGA to SPIA for Deferred Income
Last Updated on May 24, 2024 by Bryan Anderson
