MYGAs explained: How to lock in guaranteed income before you retire

Summary

• Retiring into a down market can force you to sell investments at losses, depleting your savings—this timing risk is called sequence of returns.
• Three options shield retirement savings from volatility: bonds, CDs, and MYGAs—each works differently, but MYGAs typically provide higher guaranteed rates and tax benefits.
• TIAA’s MyChoice MYGA combines guaranteed rates with an exclusive Loyalty Bonus®—boosting retirement checks while offering conversion to tax-advantaged lifetime income.³

The sequence of returns risk

No one can predict whether their investments will suddenly dip just before they need to make critical retirement withdrawals. It doesn’t take the occasional bear market to upend retirement playbooks either: Run-of-the-mill market downturns can set early retirees back because they must systematically sell in down markets for income.

Market dips are a formidable retirement challenge over which people have no control. But timing matters—as a depleted investment balance earlier in retirement increases the odds of running out of money. This conundrum is known as sequence of returns risk.

Here’s an illustration of why sequence of returns risk can be especially pernicious for soon-to-be and recent retirees. Jody plans to retire in three years with $1 million saved and spend only 4% of her savings annually ($40,000), which is a common rule of thumb. But a market slide reduces her savings to $920,000. Now Jody faces a choice: withdraw only $36,800 annually (4% of her reduced balance) and receive $3,200 less income off the bat, or she could withdraw a larger proportion of savings, 4.3%, to get $40,000. Played out over multiple years, this poses significant risk to retirement security.

There is, however, a strategy to circumnavigate uncertainty and prevent these losses—reallocating more money to an account or product that will protect a portion of your money as you get closer to retirement. Many people already have money saved in a target date portfolio, which gradually gets more conservative as you get closer to retirement. That may not be enough to bring you the security you want, though. If you really want to retire at a certain time, you need to ensure that a portion of your money is fully protected.

“We help our clients prepare for sequence of returns risk by running simulations and understanding the outcomes,” says Peter Purcell, TIAA Vice President Wealth Management Advisor. “We talk about the benefits of building an emergency fund that they can access during prolonged market losses and about having the appropriate levels of guaranteed investments that would help them ride out volatility.”

Multiple ways to protect

How do you safeguard your nest egg from sequence of returns risk? There are three popular avenues: bonds, CDs, and fixed annuities, including multi-year guaranteed fixed annuities (MYGAs).

• Bonds are tested but can fall short of a guarantee. Bonds are a well-known safe haven. Most retirement money inside retirement plans is bond funds, which can rise or fall in value. In 2022, for example, a common U.S. bond benchmark fell 13%, and with it, the value of many bond funds inside 401(k)s that year.
• Certificates of deposit (CDs) offer guarantees and simplicity. Banks issue CDs that offer a set interest rate for your chosen term, usually between three months and three years. Principal and interest rate are guaranteed no matter what happens in the market. People like CDs because of their simplicity, their FDIC backing, guaranteed rates, and ability to use them in a succession of short-term maturity dates to provide future income.
• Multi-year guaranteed annuities or MYGAs—like CDs but with key differences. MYGAs are fixed annuities. It can be useful to think of a MYGA like a CD, but key points set them apart. Contracts are issued by an insurance company rather than a bank. Like CDs, you can lock in a specific interest rate for a set period—but those periods for MYGAs are typically longer, spanning three to 10 years. MYGAs generally come with higher rates than CDs, and taxable income is deferred. CDs and MYGAs may both charge fees for withdrawals. The biggest differentiator between the two is that annuities offer the ability to provide guaranteed income for life. Because MYGAs grow at a guaranteed rate in all markets, one strategy is to reallocate a portion of savings as retirement nears. MYGAs can also provide peace of mind when used strategically: to de-risk a portion of your savings while approaching retirement, to secure a source of income between the time you stop working and the time you claim Social Security, or deployed as part of a larger “income laddering strategy” in retirement.

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