Mult-Year Guaranteed Annuity

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Thank you. Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Well. Finishing Well is a general discussion and education of the issues facing retirees.

CardinalGuide.com, Cardinal Advisors, and Hans Shile CFP sell insurance. This show does not offer investment products or investment advice. Welcome to Finishing Well with Certified Financial Planner Hans Shile. Today's show is we're gonna work on a word you may not have heard before.

I certainly had never heard it prior to meeting John, but it's one that I've come to really appreciate. And so we're going to work on appreciating this word, which is MYGA, which is spelled M-Y-G-A. And so that's a multi-year guaranteed annuity.

But, you know, in the history of Robbie and the Christian Car Guys show, I've always liked acronyms. And so we're gonna call this a multi-year guaranteed arc, right? Here's the idea that since Adam and Eve took on the curse for us when they ate the apple, they realized that they were naked. And since that time, we've needed to be covered in some way. And that really is the purpose of the arc and Jesus' blood to some extent. But I want you to think about when you're feeling ashamed is when you tend to cover sometimes with the wrong thing. And so Satan definitely uses this against you.

And you might want to write this down, because to me this is a real nugget. Satan knows your name, but he calls you by your sin. God knows your sin, but he calls you by your name. And in that, you can see when Satan starts to call you by your sin, you immediately reach for something to cover, you know, which is certainly the idea of shame. But what God would have you do is say, wait a minute, I got you covered.

I died, you know, my blood is here for that very purpose. And so I like the idea of a multi-year, and this goes on and on. In fact, it's eternal, guaranteed, absolutely guaranteed arc. And maybe from that you can get the idea of the multi-year guaranteed annuity.

So I'll let you take it from there, John. Yeah, so the multi-year part, the year is the term. So it's in whole units of a year. And the multi-year talks about two year, three year, four year, five year, six year, and we don't sell that many seven, eight, nine, and ten year migas, but you can buy these of terms all the way from two to ten. And the term that we sell the most of is the five-year term. So you're tying your money up for five years. And so right off the bat, some people don't like that. Some people love it, because once we tell them the interest rate, because the interest rates on these have gotten to be about 3.3, 3.4% just of the last few weeks on a five-year myga.

And so what does that mean? You put $100,000 into this thing, you agree to leave it there for five years, and then at the end of the five years, you're going to get, well you get it credited every month, but you're going to get credited at 3.4%. Now, what's nice about this is you don't pay taxes currently on the interest you're getting. So it's called tax deferred, so that's an even sweeter thing. When you have a CD at the bank, even though the money is tied up for five years, if you get credited interest every month, you've got to pay taxes on that interest, even though you didn't really get it, because it's stuck in the CD. With these things, it's stuck in there, but you're not paying taxes on it until you draw it out. And then at the end of the five-year term, you can just roll it over into another one, and you can postpone these taxes all the way until you die.

So it has a lot of advantages. So the multi-year, the M and the Y just talk about you can choose your term all the way from two to ten years. The guaranteed part means that the insurance company states the guaranteed interest rate for the whole period of the term. So if you buy a five-year MIGA with a 3.4% interest, that's guaranteed for the whole time.

It's not something that's going to change. And then the last letter is annuity, or what Robbie characterized it as an arc. And so the annuity part throws some people, because they think, oh, we're going to all of a sudden into all these complications of an annuity. This is the simplest annuity that we sell. It's just no more complicated if you put $100,000 in there, you left it there for five years, and for the next five years, if you got 3.4% for compounded and cumulative for five years, you're going to have $20,000 added to your $100,000 at the end of the deal.

And you will not have paid any taxes on that $20,000 of accumulated interest. And there's no fees, nothing. I mean, it's literally just that simple. And it's a big issue right now, because so many people are holding so much cash. And that's a great solution for that, right?

Well, it is. And one of the reasons people hold cash is they want it available to them. I mean, cash is the most liquid thing that there is. And by cash, I don't necessarily mean paper money in there under the mattress. I'm talking about money in your checking account in a demand deposit or a money market account. So one of the reasons they leave it there is they can go get it. But the problem is that what would be appropriate to have $20,000 or $30,000 or $40,000 of money that you could go lay your hands on, there's people that we run into all the time that have $100,000, $160,000, $200,000 of cash that they're holding in various accounts. And the reason for that is interest rates have been so low for so long that the banks on time deposits or even CDs are paying much less than 1%. And so people are thinking, if all I'm going to get is three-tenths of a percent or two-tenths of a percent or less, why tie it up in the first place?

Let it just sit there. Yeah, and then the market has been volatile as crazy, so people aren't doing that. Well, and when you talked in your example in your lesson, you talked about shame. I mean, people are ashamed of this, by the way, because when they come in to see us, they're showing us all their stuff. They're showing us their money and what they have and what they've done with it, and that's part of the incoming process. And then they're always, well, I don't say anything about this, but I got this amount. People are not real pleased with themselves that they have these large amounts just sitting there, that they feel like there needs to be something done with it.

And this is clearly an option. So that's one group that we're talking to, is the people that are sitting on cash. The second group that we're talking to are people that are invested, they have a brokerage account, they have a 401K, they have an IRA, they have money outside of an IRA, and it's invested. And because they have developed some years, it's not all in stocks. A lot of it's in fixed income. And then fixed income itself has not been yielding very, very much as well, is that people are really bummed about it. If they're in a 60% stock, 40% fixed income asset allocation, they're earning like 2% or maybe even losing money, or 1% on their bond allocation, or their fixed income allocation.

So that's another group that we're talking to. And we're not suggesting taking all of that money, but many of our clients that are invested with us, we're taking a portion of their fixed income money, which they're not making much on, and putting it into Migas, where they're getting more interest, and they still have access to the money, but that's basically it to get better yields, and there's no fees on these things. So you're getting a better yield, obviously, than a CD or something, and it's guaranteed, right?

So you don't have to worry about it like being in a volatile stock market. And the interest rate is really pretty good right now, and getting better? Yeah. Well, they've come up. I mean, they had hit rock bottom. I mean, these five-year Migas two years ago, we were paying people 4%, and we were selling them a lot, because people were locking in 4% for five years. And then they dropped down to like 3.8, 3.6. We still sold a lot of them, and then we were trying to catch people at the last minute into the 4%. But then when the coronavirus thing hit, and all that liquidity was thrown into the system, and just these companies lowered their rates on the five-year Miga, where the best of them were paying like 3% or 3.1. And now, and that's the way it's been for a couple of years, and we've still sold quite a few of them, because that's looking pretty good compared to 0.2 or 0.3 to the cash people, the people that are sitting on cash. And so what's happened over the last couple of weeks is these things have come up to about 3.3, 3.4% on the five-year deal.

And we're just seeing a rush on these things, where people are starting to come through. And let me tell you a little story. After the break, I'm going to tell the story about one particular client and where her needs were, and it may be a little bit like some of you. You may find some similarities there.

Yeah, it's a wonderful story. So it's a good place to pause and say this show is brought to you by cardinalguide.com. Don't forget the guide after cardinal.com, and it's also available on their YouTube channel, which is cardinaladvisors.com. And so there you're going to find at cardinalguide.com the website, as well as Hans' complete book, I mean his book, The Complete Cardinal Guide to Planning for and Living in Retirement. It's all there again at cardinalguide.com. So when we come back, we'll share more of this whole idea of the MIGA, again, multi-year guaranteed annuity, or ARC as the case may be.

We'll be right back. Hans and I would love to take our show on the road to your church, Sunday school, Christian, or civic room. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, Veterans' aid and attendance, IRAs, Social Security, Medicare, and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday school, Christian, or civic group. Contact Hans at cardinalguide.com.

That's cardinalguide.com. Welcome back to Finishing Well with certified financial planner Hans Scheil. I called him John a little bit earlier because he actually goes by John between friends, but his book is written by Hans, so we know him as that as well so often. You might hear me make the mistake because when we're talking between friends, he's John. I don't think I've ever told him that on the air, have I, Hans?

No, I don't think so. But anyway, Hans is a kind of name you don't forget, and so that was how he authored his book, which that was the name you were born with, right, Hans? That's exactly right, and that's the name my mom and daddy gave me, but they always called me Johnny, and that was my dad's name, and my dad was a German immigrant, and so back in 1949, you could have a real name and then you could go by something else, and that worked great until they invented the computer and the internet. Now, you know, if you're a CFP and you have an insurance license and your name is Hans, you've got to be Hans to the public. You can't go by John or Bubba or Tommy or something else.

Or Robbie. Yeah. Right. Well, getting back, Hans, you were going to share a story about an example of where this MIGA thing and the ladder strategy, which we get into, is absolutely awesome. Yeah, I mean, we've talked about this client before. She's been a long-time client of mine, and she came into, five or six years ago, about $400,000 through the sale of some land that was owned jointly by her deceased husband with some of his brothers and sisters and parents and that kind of thing. So anyhow, she gets $400,000, and I helped her literally to pay zero income tax on the sale of this substantially appreciated land, and she was very grateful for that. And then we really convinced the relatives to buy her out because we needed to put together a long-term care plan for her.

We get the money. One of the first things we did is we paid off her mortgage, and then we spent about $40,000 of the money on some things to bring her some joy in the present and took a vacation, treated the family, and then that left us with about $200,000. So we ended up using the annuities as deferred annuities that do have some enhanced long-term care benefits, and there's no health questions.

So anyhow, that's the past. She had a bunch of annuities. Everything's going along just fine until she lands in an assisted living because she couldn't be taken care of at home, and so now she's in an assisted living, and it's time to take all these annuities, turn on the income. We pretty much balanced the budget in the sense where we could pay for the assisted living and pay her other expenses out of her Social Security check and the income that she was getting out of these annuities, but it just kind of left her with no access to the principal, and she and her daughter were playing Monday morning quarterback, and we were kind of looking, why did you put us in all these annuities? We can't get at the principal, and so anyhow, we kind of worked our way through that, and what we were looking for the future, like if her expenses go way up, she's got a problem because she still owns her house, and once she knew that she's going to be in this assisted living or something like it permanently, we decided, I just told her, you've got to sell the house, and that took us a long time. And then when we got the house for sale, she got over $700,000 for this house and land, and so in some ways solved all her financial problems. Now she's got all her bills paid with the income from these annuities, and then she didn't get all that money because she had to pay some commissions and expenses, but when you get all said and done, about $650,000 of it is what she netted, and so she's in to see me and figuring out what we're going to do about it, and boy, they were not interested in hearing about annuities or more annuities. And so where we kind of ended up was, well, you're going to keep $150,000 in the bank, plus the money she's got in the bank, so we've got plenty of liquidity to be able to pay the bills, run into some problems, and then she wanted to invest the other $500,000.

And this is right while the market is starting to go sideways back in January and February where we're talking about it, but that didn't seem to waver. She's ready to put $500,000, and so we do all the proposals, and then when she finally came in here after she had closed the house and she's got the money, we're going to do this, she all of a sudden has a little cold feet and going into the market, she says, how about if we just do $250,000 in the market, and then what are we going to do with the other $250,000? You know, they're kind of posing a question, and we ended up on these MIGAs. And so what we set up for her is a MIGA, which is a multiyear guaranteed annuity, and we set up five separate MIGAs, one for two years, one for three years, one for four years, one for five years, and you guessed it, six years. So at the end of two years, she's going to have $50,000 come and do that's completely available to her, plus the interest, so if she needs the cash, she can just take out that $50,000, but she's not going to need the cash. What she's going to do at the end of the two years is just buy another five-year MIGA and roll the interest she hadn't paid taxes on yet to the seventh year. If she doesn't need it, it just kind of rolls on paying her a very good rate of interest compared to other guaranteed things, goes on forever until she passes away. Is that pretty clear? Yeah, with interest rates on the rise, and it looked like they would be short-term, the two-year deal isn't all that unattractive because in two years, interest rates, hopefully, will be substantially higher, and when you roll it over, you're rolling it into something even bigger.

Oh, yeah, and you're going to roll the two-year into a new five-year, which is effectively that seventh year if you go back to the beginning, and that just keeps going on. Yeah, I mean, it gives you some leverage on that, and I haven't talked to you about liquidity rights on these annuities, so she was very interested in this because there's a 10% penalty-free withdrawal each year on all five of these annuities, so she has a total of $250,000 in all five of them, $250,000 each, and during the contract year, at any time, she can take up to 10% of the value, so she could get her hands on $25,000 just like immediately anytime she wants to do it, and then after March rolls around, she can get another $25,000 because now you're into a new year. So that liquidity is something that's very unique to MIGAs that's not on CDs is that you can pull out 10% and you can do it selectively on whatever ones you want. Well, with some companies, you have to buy that or, in other words, take a little less interest for that.

Some of them just give it to you, so that would be something you'd learn about when you're shopping for these things with us. Yeah, and there's also—that's called a rider, from what I understand, like red rider. So it's a rider.

I mean, it's just there's two optional riders on these things. One is the liquidity rider or the 10% withdrawal, penalty-free withdrawal rider. The other one is the beneficiary payout. If she's to die during the term of any of these annuities, her beneficiaries would have the option of either leaving the money there till the end of the term and then collecting that in the interest or just taking a settlement of what it's worth now. So if she dies during the term, her beneficiaries will receive a full payout if they want that.

And both of those are riders or things that are added onto these. Right, and stuff that, you know, again, why it's really good to have a CFP, somebody that understands the certified financial planner, who understands all the different options because you even described something I hadn't heard earlier when you were talking about when she originally came to you, that there was something about long-term care that was also involved in one of her original annuities. So now we're off of MIGAs and we're on to just regular annuities. You can purchase a long-term care enhancement and you don't have to answer any health questions to do it. So we do these for a lot of people who are in poor health, like she was, and they can't get traditional long-term care insurance or hybrid long-term care insurance, but they can buy these. And what they do is they offer enhanced income, or doubled income is really what it is, or you can call it enhanced, it's doubled, when you're either in an assisted living or you're getting care at home that meets the requirement.

And so we just turned on those doubled amounts. And what they were both a little bit upset about is they wanted their cake and eat it too. They wanted access to the money and the doubled income, and you can't have both. If you pull the money out, then you don't get the doubled income. If you get the doubled income, you can't have the money. But you can want it. I don't blame them for wanting it. Yeah, I don't either.

But they just didn't understand. And so the MIGAs don't have that feature on there because they're not set up to pay income. They're set up to be a term deposit or a time deposit. It's just here's the period of time, here's the interest rate, the interest gets credited at a much higher rate than you're going to find out on the market, and then the interest accumulates.

If you don't pull it out, you don't pay taxes on it until you actually pull it out of there and use it for something. So it has all the benefits of an annuity. So with this second group of money, she just wants her money and she wants possible access to it, but she also wants a high yield.

And those two things don't go together. If we want to get her a high return, well then we can't invest all that in the stock market. What if she needed the money when stocks were down? So this whole thing looked really good to her, and just the fact of having access to 50 grand, optionally every year over a period of five years, looked really good to her. Combined with a little bit of liquidity access on some of the longer term ones, I think there's a good chance that when I go back and deliver these policies to her, she may lose these stock market ideas and she may take the other $250,000 that she invested, that by the way isn't $250,000 anymore, it's like $243,000. So she's been successful in losing like $7,000 over the last two months because it's been a worse time to be in the market.

I mean it was just her timing, and fortunately we didn't throw all her money in there, but I can see her now just doubling up and taking that second lot of money and putting her in the same thing. Yeah, so as usually we've run out of show before, I mean we ran out of time before we ran out of show, but as you can hear there's much to learn, and so this show is brought to you by CardinalGuide.com where you've got Hans' website, and you can find his book, The Complete Cardinal Guide to Planning for and Living in Retirement, as well as his YouTube channel, Cardinal Advisor. So thanks Hans, another great show.

Yeah, thank you. investments and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement, and the workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to CardinalGuide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's CardinalGuide.com. CardinalGuide.com. This is the Truth Network.