A financial plan is a system that allows all the parts to contribute to the success or failure of the whole plan. Planning is the act of projecting forward to what we want to build financially. There are eight components for constructing a financial plan, but I want to address the two that most often get overlooked. The first, is becoming a financial consumer, and the second, is defining the purpose of each goal. In the purchasing process, as a financial consumer, emotions and logic play a major role. These can be boiled down to fear and greed. These create internal conflict during the purchasing process. Advertisers focus more on the sizzle than the steak to get you to buy. They want to stir your emotions and mitigate your logic. This explains why the most common phrases used to sell products are financial loss and performance. Knowing what you want makes it easier to filter through the sizzle and find the steak. Only then will the planning process take on clarity instead of emotions.
In order to achieve your financial plan you have to purchase products that meet the purpose defined. One purpose in a financial plan is guaranteed principle and growth of assets. A Multi-Year Guaranteed Annuity (MYGA) is one consideration that brings concrete answers to the projection of growth. The reason is that a MYGA has a guaranteed rate of return per annum for a specific period of time. Thus, calculating the future growth is guaranteed. In addition, the earnings, or growth, is tax-deferred for non-qualified accounts. This simplifies the planning process for calculating how much money you will have over a specific period of time, and guarantees what assets you will have at the end of the period.
By definition, you can now determine if a MYGA fits in your financial plan. If you goal is to accumulate $1,000,000 for retirement income the calculation becomes straight forward with a MYGA. The simplicity of this annuity contract allows you to know with certainty how much money you will accumulate over a specific period of time.
Learning the details of the product is where your emotions may take over. But thankfully, a MYGA contract has limited options and each is very definable in conjunction with your purpose. Asking yourself questions will provide the needed insight for making a clear decision. Do you know how much you need to accumulate? Do you know the time frame you want to accumulate the money? Do you want the growth to be tax-deferred? Do you want to ladder the annuities to stagger the maturity dates? Do you want the money to go to a named beneficiary if you die prematurely? It is important to define exactly what you want to determine if it fits your purpose.
It is important to define the advantages of a MYGA: deferred guaranteed growth, options for duration of the growth period, can be used with qualified and non-qualitied money, no fees, and simple for planning future growth. The contractual benefits are guaranteed principle, guaranteed growth rate, and guaranteed death benefit. If the lack of principle risk and guaranteed growth rate satisfies your logical and emotional thought process then a MYGA may be a perfect fit.
It is equally important to define the disadvantages of a MYGA: the biggest drawback is the lack of liquidity during the defined period of the contract. You transfer a lump sum of money to the insurance company for a guaranteed period and a guaranteed return, or you forfeit control during that period. Rates of returns are generally equivalent to 10-20 year treasury bonds. A 10% IRS penalty for early withdrawal (before 59 ½) on the growth portion of the account value. This brings up the issue of fear and greed. Can you emotionally deal with the greed factor of not being invested in the stock market despite having no risk or volatility? And, can you logically and financially make that decision? If the
answer is “no” and you are willing to take on the risk of managing your own money then a MYGA will not fit your logical and emotional needs. It is best to pursue other avenues.
Weighing out the advantages and disadvantages is part of the process of being a financial consumer. Knowing your purpose makes the process of achieving your financial plan doable. If you fail to pacify both sides of your brain the final decision will be impossible and result in poor decisions. Know what you want, define your purpose, learn the details, and then make the decision. Most importantly, don’t allow fear or greed to be the determining factor. Buy the steak because it fits your needs and plans… not the sizzle.
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