Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGAs.

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VTI
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Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGAs.

Post by VTI »

MYGAs (multi-year fixed annuities) offer dramatically higher yields than bond funds. Their earnings are tax deferred, even outside of IRAs. They are guaranteed both by insurance companies and by state governments guaranty associations. They're incredible.

That being said, bond funds do have a single advantage over MYGAs: Rebalancing. When stock prices drop, you can easily sell some bonds to buy more stocks. MYGAs are less flexible.

Therefore, you should keep JUST enough money in your bond fund to allow for reasonable rebalancing.

For example, let's say your desired asset allocation is 60% stocks and 40% fixed income, and you plan to rebalance every quarter. Your portfolio could look something like this:
  • 60% stocks
  • 20% bonds
  • 20% MYGAs
If stocks crater 50% in one quarter, your portfolio would look something like this (ignoring any growth in fixed income):
  • 30% stocks
  • 35% bonds
  • 35% MYGAs
You could then rebalance solely using money from your bond fund:
  • 60% stocks
  • 5% bonds
  • 35% MYGAs
Of course, a 50% drop in one quarter is a cartoonish, nearly unprecedented example. If you wanted to plan for smaller quarterly stock drawdowns, you could allocate even less money to bonds and even more to MYGAs. (And if you are satisfied only rebalancing using new contributions, then you don't need a bond fund at all.)

Large institutions are forced to buy bonds in order to park their money. You aren't. You're an individual investor—you have more options available to you! Take advantage of them!

(Edit: Savings bonds are another great option for individual investors. Regardless of where one stands on savings bonds vs MYGAs, the annual purchase limit for savings bonds is below many folks' annual fixed income allocation, and that's when MYGAs can come into play.)
Last edited by VTI on Tue Apr 13, 2021 1:53 pm, edited 7 times in total.
Wk1014
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Wk1014 »

Any chance OP sells these MYGA’s
Ocean77
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Ocean77 »

As I was reading the OP, I was actually expecting there would be some offer at the end on where to buy them. Hopefully with some special deal for BH members.
Topic Author
VTI
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by VTI »

Wk1014 wrote: Tue Apr 13, 2021 1:53 am Any chance OP sells these MYGA’s
I'm a software developer who has zero relationship to the insurance industry nor to anyone who sells these!
JBTX
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by JBTX »

VTI wrote: Tue Apr 13, 2021 12:55 am MYGAs (multi-year fixed annuities) offer dramatically higher yields than bond funds. Their earnings are tax deferred, even outside of IRAs. They are guaranteed both by insurance companies and by state governments. They're just incredible!

That being said, bond do funds have a single advantage over MYGAs: When stocks drop, you can easily sell bonds to rebalance back into stocks.

Therefore, you should keep JUST enough money in your bond funds to allow for reasonable rebalancing.

For example, let's say your desired asset allocation is 60% stocks and 40% fixed income, and you plan to rebalance every quarter. Your portfolio could look something like this:
  • 60% stock funds
  • 20% bond funds
  • 20% MYGAs
If stocks crater 50% in one quarter, your portfolio would look something like this (ignoring any growth in fixed income):
  • 30% stock funds
  • 35% bond funds
  • 35% MYGAs
You could then rebalance solely using money from your bond fund:
  • 60% stock funds
  • 5% bond funds
  • 35% MYGAs
Of course, a 50% drop in one quarter is a cartoonish, nearly unprecedented example. If you wanted to plan for smaller quarterly stock drawdowns, you could allocate even less money to bonds and even more to MYGAs. (And if you only want to rebalance using new contributions, then you don't need bond funds at all.)

Large institutions are forced to buy bonds in order to park their money. You aren't. You're an individual investor—you have more options available to you! Take advantage of them!
Perhaps they make sense, but their yield is only marginally better than a comparably rated corporate bond, and a corporate bond is more liquid. A corporate bond can be kept in a traditional IRA, either deductible or non deductible and get tax deferral.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by ivk5 »

I agree with the spirit of the OP. I'm guilty of taking a fairly broad-minded view of the fixed income part of my allocation. My fixed income (inclusive of EF / no separate EF) is currently allocated approximately as follows:
  • (40%) 3% CDs maturing 2024. One is a 2019 vintage 5-year with an unrestricted top-up option that turns out to have been a bonanza (GTE Financial). Another is a 2017 vintage 7-year (Andrews FCU). Unfortunately these are in taxable. Honestly can't remember what the EWPs are, probably 6 months.
  • (40%) Various mandatory and illiquid employer-linked plans:
    • An interest-bearing NQDC-like vehicle (variable, prime plus X). Fully vested but accessible only after separation. Subject to employer's creditworthiness, admittedly a bit risky to consider part of fixed-income allocation due to idiosyncratic risk.
    • Pension plans (self and spouse) that are mandatory in our (non-US) country of current residence. Fully vested and very safe but accessible only if/when we retire (annuitized) or move out of the country (in some cases). Interest-bearing in theory but currently earning virtually nothing (ZIRP).
  • (10%) I Bonds. Only became aware / started purchasing in 2018, so low fixed rates. I like the diversification from having these unique instruments that blend reasonable liquidity and tax optionality with predictable real return and deflation protection. Unfortunately purchase limits force declining allocation over time (good problem to have of course).
  • (10%) HYSA/cash-equivalents. Largely for liquidity. Perhaps sub-optimal - I have taxable equities that could serve as EF - but helps me SWAN and preserves some optionality.
  • (0%) Auto financing variable-rate demand notes. Opened a Toyota IncomeDriver note (currently 1.5%) as an experiment / for optionality after reading the discussion here but haven't funded beyond initial $500. Fully liquid but subject to idiosyncratic credit risk and call risk (rate changeable without notice). Haven't decided if/when this gets a more meaningful allocaiton.
  • edited to add - no current allocation but may reconsider when I hit NCUA insurance limit on the top-up CD and/or when the CDs mature in 2024:
    • (0%) Total Bond Market. IIRC I liquidated my TBM holdings when I jumped into the 2019 CD.
    • (0%) MYGAs. Thanks to the top-up feature of the 2019 CD I haven't had to look seriously at MYGAs yet. Have appreciated posts here exploring the topic (Stinky's as well as this thread).
I view this as the part of the portfolio where I get to tinker, for kicks, even if the resulting optimization is de minimus; equities are entirely in VTI/VXUS and equivalents.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Stinky »

I'm currently a fan of MYGAs. As I have mentioned elsewhere, I have constructed a "MYGA ladder" of various maturities for myself, similar to a CD ladder. I also hold bond funds, but my MYGA balance is currently larger than my bond fund balance. My MYGA purchases began about six months ago. Most of my MYGAs are in IRA accounts, and I also have a MYGA in my taxable account.

As full disclosure, I do not sell insurance of any type and never have. However, I worked in a senior financial position for a major life insurance company for my entire working career, and I've seen the product specifications and pricing for many life and annuity products, including MYGAs. So I've got more personal knowledge than many folks do about how annuities and life insurance work.

On the good side -
—- MYGAs currently offer an interest rate well higher than available on bond funds of similar duration.
—- MYGAs also have a credit backstop, beyond the insurance company guaranty, of the state life and health Guaranty Funds. I have seen Guaranty Funds in action with respect to insolvent life insurers. The Funds do their best to fully restore policyholders to their full position in the unfortunate case of an insurer failure, up to the limits of the Guaranty Fund. Anybody buying a MYGA should be familiar with the limits of his state's Guaranty Fund. (Google "(your state of residence) life and health guaranty fund" to find the website for your state's Fund.)
—- Any annuity (including MYGAs) that are purchased in a taxable account defer the recognition of taxable interest to the time when funds are actually withdrawn from the annuity, rather than reporting interest income annually as is the case with a CD or bond fund.
—- Finally, MYGAs offer transparency as to the earned rate. What you are promised is what you will get.

On the bad side -
—- MYGAs have either no or limited liquidity except at the expiry of the guaranty period. Most MYGAs have significant surrender charge and market value adjustment penalty for withdrawals beyond any penalty-free withdrawal. So a person shouldn't substitute a MYGA for a money market fund or other short-term investment.
—- When purchased in a taxable account, any interest withdrawals prior to age 59.5 are subject to an additional 10% income tax penalty, beyond regular income taxes.
—- Annuities, including MYGAs, do not receive a step-up in basis at death, so even if recognition of taxable income is deferred to a person's date of death, someone will eventually pay taxes on the interest earned.

With market interest rates at their current low level, and with the higher MYGA interest rate than bond funds, I regard the purchase of a MYGA at the present time as a win-win.
--- If market interest rates stay low, I'll be collecting the higher MYGA interest rate for the full term of the MYGA. That's a win.
--- If market interest rates rise, I may get to a place where the yield on the bond fund exceeds the MYGA. However, in that case, the bond fund will have lost market value due to the rise in interest rates, while the MYGA will not have lost value. So, once again, that's a win.

My MYGAs will be maturing over the next number of years. As each MYGA matures, I'll be making a decision as to whether to renew into a new MYGA or to roll the proceeds into other fixed income. If spreads between MYGA rates and bond funds remained at their current levels, and interest rates remain low, I'd anticipate rolling into new MYGAs at that time.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by jeffyscott »

VTI wrote: Tue Apr 13, 2021 12:55 amThey are guaranteed both by insurance companies and by state governments.
They are not guaranteed by state governments. A State Guaranty Association is not the state government.

Guaranty associations are state-sanctioned, nonprofit organizations that insure consumers in the unlikely event that their insurance companies fail and default on their payments. Insurance companies, which issue annuities, are legally required to belong to their particular state’s guaranty association.
https://www.annuity.org/annuities/regul ... ociations/
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VTI
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by VTI »

jeffyscott wrote: Tue Apr 13, 2021 10:09 am
VTI wrote: Tue Apr 13, 2021 12:55 amThey are guaranteed both by insurance companies and by state governments.
They are not guaranteed by state governments. A State Guaranty Association is not the state government.

Guaranty associations are state-sanctioned, nonprofit organizations that insure consumers in the unlikely event that their insurance companies fail and default on their payments. Insurance companies, which issue annuities, are legally required to belong to their particular state’s guaranty association.
https://www.annuity.org/annuities/regul ... ociations/
Thank you for the clarification. I have a couple of questions, neither of which are meant to sound hostile:
  1. In practice, are there any ramifications for this distinction?
  2. Should one make the same distinction regarding FDIC insurance?
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HueyLD
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by HueyLD »

Stinky wrote: Tue Apr 13, 2021 6:10 am I'm currently a fan of MYGAs. As I have mentioned elsewhere, I have constructed a "MYGA ladder" of various maturities for myself, similar to a CD ladder. I also hold bond funds, but my MYGA balance is currently larger than my bond fund balance. My MYGA purchases began about six months ago. Most of my MYGAs are in IRA accounts, and I also have a MYGA in my taxable account.

As full disclosure, I do not sell insurance of any type and never have. However, I worked in a senior financial position for a major life insurance company for my entire working career, and I've seen the product specifications and pricing for many life and annuity products, including MYGAs. So I've got more personal knowledge than many folks do about how annuities and life insurance work.

On the good side -
—- MYGAs currently offer an interest rate well higher than available on bond funds of similar duration.
—- MYGAs also have a credit backstop, beyond the insurance company guaranty, of the state life and health Guaranty Funds. I have seen Guaranty Funds in action with respect to insolvent life insurers. The Funds do their best to fully restore policyholders to their full position in the unfortunate case of an insurer failure, up to the limits of the Guaranty Fund. Anybody buying a MYGA should be familiar with the limits of his state's Guaranty Fund. (Google "(your state of residence) life and health guaranty fund" to find the website for your state's Fund.)
—- Any annuity (including MYGAs) that are purchased in a taxable account defer the recognition of taxable interest to the time when funds are actually withdrawn from the annuity, rather than reporting interest income annually as is the case with a CD or bond fund.
—- Finally, MYGAs offer transparency as to the earned rate. What you are promised is what you will get.

On the bad side -
—- MYGAs have either no or limited liquidity except at the expiry of the guaranty period. Most MYGAs have significant surrender charge and market value adjustment penalty for withdrawals beyond any penalty-free withdrawal. So a person shouldn't substitute a MYGA for a money market fund or other short-term investment.
—- When purchased in a taxable account, any interest withdrawals prior to age 59.5 are subject to an additional 10% income tax penalty, beyond regular income taxes.
—- Annuities, including MYGAs, do not receive a step-up in basis at death, so even if recognition of taxable income is deferred to a person's date of death, someone will eventually pay taxes on the interest earned.

With market interest rates at their current low level, and with the higher MYGA interest rate than bond funds, I regard the purchase of a MYGA at the present time as a win-win.
--- If market interest rates stay low, I'll be collecting the higher MYGA interest rate for the full term of the MYGA. That's a win.
--- If market interest rates rise, I may get to a place where the yield on the bond fund exceeds the MYGA. However, in that case, the bond fund will have lost market value due to the rise in interest rates, while the MYGA will not have lost value. So, once again, that's a win.

My MYGAs will be maturing over the next number of years. As each MYGA matures, I'll be making a decision as to whether to renew into a new MYGA or to roll the proceeds into other fixed income. If spreads between MYGA rates and bond funds remained at their current levels, and interest rates remain low, I'd anticipate rolling into new MYGAs at that time.
Fantastic recap of MYGA investing. Thank you Mr. Stinky.
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Stinky
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Stinky »

VTI wrote: Tue Apr 13, 2021 10:54 am
jeffyscott wrote: Tue Apr 13, 2021 10:09 am
VTI wrote: Tue Apr 13, 2021 12:55 amThey are guaranteed both by insurance companies and by state governments.
They are not guaranteed by state governments. A State Guaranty Association is not the state government.

Guaranty associations are state-sanctioned, nonprofit organizations that insure consumers in the unlikely event that their insurance companies fail and default on their payments. Insurance companies, which issue annuities, are legally required to belong to their particular state’s guaranty association.
https://www.annuity.org/annuities/regul ... ociations/
Thank you for the clarification. I have a couple of questions, neither of which are meant to sound hostile:
  1. In practice, are there any ramifications for this distinction?
  2. Should one make the same distinction regarding FDIC insurance?
1. Guaranty associations are not supported by state government tax revenues, nor are they an agency of the state government. When an insurer insolvency happens, the Guaranty Fund assesses member companies in proportion to their share of premiums written in that state. It is "post-funded"; that is, funds are gathered only after an insolvency happens.

2. The FDIC is an agency of the Federal Government. Per the following website, it does not receive Congressional appropriations. Its income is from premiums from banks and savings associations, which I assume are "prefunding" possible future losses. While I guess the FDIC's funds could be exhausted in the event of massive bank failures, I note that its parent, the Federal Government, has the power to both levy taxes and print money. :D https://www.fdic.gov/about/what-we-do/i ... 20coverage.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by bhough »

Dear OP and "Stinky",

You have change my mind. Thank you for your helpful information. I think there is a role for these if:
1. You have maxed out your pretax space including 401k, Roth (if eligible), HSA
2. You have maxed out your I bond allocation
3. You still have funds you want to place in a bonds and you have maxed out EE bonds
4. You still want to allocate some capital to bonds and are in a higher marginal tax rate currently, but won't be when these mature as these MYGAs appear to be tax deferred investments.

I recently purchase some Israelbonds which have a higher return than treasuries, but the tax is not deferred (or more specifically, on the Mazeltov bonds, they are bought at a discount. The IRS says you owe taxes on this each year the value increases). These MYGAs appear to be a way to extend your tax deferred space if you do not want to invest in stocks. Ideally, stocks would be better if one could be assured that there would be some appreciation over time as you are only taxed on the capital gains when you sell, and long term capital gains are taxed at a lower rate than W2 and interest income. TIPS also incur yearly taxes (at your highest marginal tax rate). Also, one has to pay a premium now to buy a TIPS. (I purchased a 100 TIPS last year for 107,...)

Thanks again. I called the company and asked for a contract. I'll read and repost if it is different than what they said on the phone,...
b
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by investnoob »

If it is a multi-year fixed annuity why is the acronym MYGA instead of MYFA?
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Stinky »

investnoob wrote: Tue Apr 13, 2021 11:37 am If it is a multi-year fixed annuity why is the acronym MYGA instead of MYFA?
Multi year guaranteed annuity. MYGA.

I’d imagine that some marketing person from the distant past thought that “MY-gah” sounded better than “MY-fah”. To me, MYFA sounds like a dangerous disease. :D
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Rex66
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Rex66 »

The results from state guaranty association has been discussed.

If a company gets in trouble (which isn’t often) they have historically made annuity clients whole 94% of the time and life insurance 96% of the time. If below limits then near 100%. In really bad cases it took years to be made whole though.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by PaulieLilly »

I'd also like to thank Stinky (and others) for all the MYGA insights. I've been on a steep learning curve since unexpectedly receiving (and accepting) an early retirement package. I recently completed a MYGA ladder which I funded by replacing ~50% of the bond holdings in my t-IRA, while staying within my state's $500k Guaranty Fund. Other than the "slowness" of dealing with life insurance companies, it was an easy process.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by nisiprius »

jeffyscott wrote: Tue Apr 13, 2021 10:09 am
VTI wrote: Tue Apr 13, 2021 12:55 amThey are guaranteed both by insurance companies and by state governments.
They are not guaranteed by state governments. A State Guaranty Association is not the state government.

Guaranty associations are state-sanctioned, nonprofit organizations that insure consumers in the unlikely event that their insurance companies fail and default on their payments. Insurance companies, which issue annuities, are legally required to belong to their particular state’s guaranty association.
https://www.annuity.org/annuities/regul ... ociations/
And they do not "insure" consumers. The National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) like the vague term "safety net." That's because "insure" has a legal meaning which does not describe what the guaranty associations do.

I believe the state guaranty associations provide meaningful protection, up to limited numbers of dollars, against failures of individual insurers. I think anyone buying an insurance policy should visit https://www.nolhga.com -- spell it carefully and watch out for typosquatters--and go to

https://www.nolhga.com >> Policyholder information >> Choose your state organization >> [your state] >> FAQs

and read the FAQs.

And a guaranty association is not a "fund" and there is no pool of money behind it. Basically, most or all states have laws that say "any insurer doing business in the state has to get together with other insurers to take care of policyholders of insurance companies that fail." They usually do it by having one of them take over the policy, and they have the right to cut back on the terms if they were too generous.

It's meaningful, and you should know about it, and the part of the law that almost prohibits insurance companies from telling you about it is against the best interests of consumers--but it is not like FDIC insurance. It's weaker, complicated, and nuanced.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by nisiprius »

"I wonder often what the Vintners buy
One half so precious as the stuff they sell." --Rubaiyat of Omar Khayyam, quatrain XCV

Can anyone explain clearly what the insurance companies are doing--what investments they are buying--that seemingly enable them to beat bonds on return without additional risk? If there is additional risk, what and where is it? (I don't think insurer insolvency is a serious risk, I'm looking for something else).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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VTI
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by VTI »

bhough wrote: Tue Apr 13, 2021 11:22 am Dear OP and "Stinky",

You have change my mind. Thank you for your helpful information. I think there is a role for these if:
1. You have maxed out your pretax space including 401k, Roth (if eligible), HSA
2. You have maxed out your I bond allocation
3. You still have funds you want to place in a bonds and you have maxed out EE bonds
4. You still want to allocate some capital to bonds and are in a higher marginal tax rate currently, but won't be when these mature as these MYGAs appear to be tax deferred investments.

[...]
You're very welcome!

More or less, I agree with your list. I first load up on I Bonds, then EE Bonds, then MYGAs.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by watchnerd »

VTI wrote: Tue Apr 13, 2021 12:55 am MYGAs (multi-year fixed annuities) offer dramatically higher yields than bond funds. Their earnings are tax deferred, even outside of IRAs. They are guaranteed both by insurance companies and by state governments guaranty associations. They're incredible.

That being said, bond funds do have a single advantage over MYGAs: Rebalancing. When stock prices drop, you can easily sell some bonds to buy more stocks. MYGAs are less flexible.

Therefore, you should keep JUST enough money in your bond funds to allow for reasonable rebalancing.

For example, let's say your desired asset allocation is 60% stocks and 40% fixed income, and you plan to rebalance every quarter. Your portfolio could look something like this:
  • 60% stock funds
  • 20% bond funds
  • 20% MYGAs
If stocks crater 50% in one quarter, your portfolio would look something like this (ignoring any growth in fixed income):
  • 30% stock funds
  • 35% bond funds
  • 35% MYGAs
You could then rebalance solely using money from your bond fund:
  • 60% stock funds
  • 5% bond funds
  • 35% MYGAs
Of course, a 50% drop in one quarter is a cartoonish, nearly unprecedented example. If you wanted to plan for smaller quarterly stock drawdowns, you could allocate even less money to bonds and even more to MYGAs. (And if you are satisfied only rebalancing using new contributions, then you don't need bond funds at all.)

Large institutions are forced to buy bonds in order to park their money. You aren't. You're an individual investor—you have more options available to you! Take advantage of them!
I can take that same money that would go into an MYGA and build a TIPS LMP ladder for myself, instead.

And I don't have to pay someone else.
60% Global Market Stocks (VT,FM) | 38% Global Market Bonds | 2% crypto & securitized gold || LMP TIPS/STRIPS || RSU + ESPP
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VTI
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by VTI »

watchnerd wrote: Tue Apr 13, 2021 12:59 pm
VTI wrote: Tue Apr 13, 2021 12:55 am ...
I can take that same money that would go into an MYGA and build a TIPS LMP ladder for myself, instead.

And I don't have to pay someone else.
https://www.treasury.gov/resource-cente ... =realyield

Do you believe these yields are competitive with MYGA yields after inflation? Certainly not in the short term, right?
rich126
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by rich126 »

My limited understanding of MYGAs is that they pay a fairly minimal (1%) commission to anyone selling them. As a buyer of the MYGA you don't save anything if you buy them directly or pay extra going through someone collecting a commission. At least that is what I've been told.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Rex66 »

nisiprius wrote: Tue Apr 13, 2021 12:43 pm "I wonder often what the Vintners buy
One half so precious as the stuff they sell." --Rubaiyat of Omar Khayyam, quatrain XCV

Can anyone explain clearly what the insurance companies are doing--what investments they are buying--that seemingly enable them to beat bonds on return without additional risk? If there is additional risk, what and where is it? (I don't think insurer insolvency is a serious risk, I'm looking for something else).
They don’t beat bonds necessarily and are about 80% invested in bonds.

Insurance companies typically have multiple products and when you take into consideration fees, surrender, lapses, charges for insurance/riders etc, it juices their returns on some products.

Insurance companies occasionally get the assumptions wrong. That’s why ltci is a mess. Ohio national just announced demoralization bc it wasn’t working out.

When interest rates rise, especially quickly they will lag bc the duration of their bonds. It’s one reason why ULs became popular instead of WL in the 80s
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by HueyLD »

rich126 wrote: Tue Apr 13, 2021 1:07 pm My limited understanding of MYGAs is that they pay a fairly minimal (1%) commission to anyone selling them. As a buyer of the MYGA you don't save anything if you buy them directly or pay extra going through someone collecting a commission. At least that is what I've been told.
“ Yes, we do make a commission. It typically ranges from 2-5% per purchase, depending on product, term, and insurer. ”

https://www.blueprintincome.com/fiduciary-principles
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Stinky
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Stinky »

nisiprius wrote: Tue Apr 13, 2021 12:43 pm "I wonder often what the Vintners buy
One half so precious as the stuff they sell." --Rubaiyat of Omar Khayyam, quatrain XCV

Can anyone explain clearly what the insurance companies are doing--what investments they are buying--that seemingly enable them to beat bonds on return without additional risk? If there is additional risk, what and where is it? (I don't think insurer insolvency is a serious risk, I'm looking for something else).
I don't think that any person outside of an insurance company can tell you exactly how they price MYGAs. And that would be proprietary information.

From my past memories of these products, several things come to mind:
1. Life insurance companies invest in corporate bonds and, to a small extent, treasuries. But they also invest in commercial mortgages, mortgage-backed securities, collateralized mortgage obligations, etc., which often pay higher interest rates than corporate bonds. Also, they invest at a scale that could give them a yield advantage over an individual.
2. Surrender charges and market value adjustments are a significant source of revenue. People do surrender these things, in fairly predictable numbers. Additionally, some of the lower-rated companies do not waive surrender charges upon death.
3. MYGAs are priced on a portfolio basis. The "portfolio" is likely at least as large as "all MYGAs of all durations". This might allow some cross-subsidization of the credited rate on shorter-duration liabilities relative to longer-duration liabilities. If the portfolio brings in other liabilities, such as SPIAs or life insurance (both of which are very "long" liabilities), that might further allow subsidization of MYGA credited rates.
4. The insurance company may accept some mismatch risk, and invest "long" relative to the MYGA liabilities.

Further, note that lower rated companies generally assign less capital to liabilities than higher-rated companies. That explains, in part, why lower rated companies have higher credited rates than higher rated companies.

In summary, I can't say exactly how insurers price their MYGAs. But every insurer I've ever seen has a rigorous process for determining their credited rates, and they expect to make money on the business that they write.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by quaternion »

nisiprius wrote: Tue Apr 13, 2021 12:43 pm Can anyone explain clearly what the insurance companies are doing--what investments they are buying--that seemingly enable them to beat bonds on return without additional risk? If there is additional risk, what and where is it? (I don't think insurer insolvency is a serious risk, I'm looking for something else).
For your consideration, The TIAA General Account. They hold some things that we small frys can't, can't easily, or shouldn't:
* Private Lending
* Commercial mortgage lending
* Private equity and subsidiaries
* Direct real estate (including commercial and industrial)
* Natural resources (e.g., timberland)
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by watchnerd »

VTI wrote: Tue Apr 13, 2021 1:06 pm
watchnerd wrote: Tue Apr 13, 2021 12:59 pm
VTI wrote: Tue Apr 13, 2021 12:55 am ...
I can take that same money that would go into an MYGA and build a TIPS LMP ladder for myself, instead.

And I don't have to pay someone else.
https://www.treasury.gov/resource-cente ... =realyield

Do you believe these yields are competitive with MYGA yields after inflation? Certainly not in the short term, right?
What do you think the MYGA is going to invest in that I cannot?

They can't magically create higher yields out of nothing.

So if they're getting higher yields, they're taking on more risk, either on the bond side, the stock side, or illiquid investments in PE/VC (which I also have).

I can invest in risky things by myself just fine as part of the Risk Portfolio that lives alongside the LMP.

And I can do it myself for a lower ER and sales commission than they will charge.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by bhough »

When comparing to TIPS, you have to compare after tax return as TIPS phantom income is taxed at your current top marginal tax rate. Currently, TIPS require a premium to purchase, or to put it another way have a current negative yield. The principal of the TIPS is adjusted, but that is incurred as a tax in the current year. Thus one can not compare this product directly to TIPS given the tax deferred nature of this product.

I bonds beat MYGA hands down, but one can only buy $10,000/year of I bonds. This could be a useful too in building a LMP if you will be in a lower tax bracket in 10 years. It isn’t clear to me that these are better or worse than nominals and TIPS at current rates. I think OP has made a controversial, but ultimately correct assertion.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by watchnerd »

bhough wrote: Tue Apr 13, 2021 2:43 pm When comparing to TIPS, you have to compare after tax return as TIPS phantom income is taxed at your current top marginal tax rate. Currently, TIPS require a premium to purchase, or to put it another way have a current negative yield. The principal of the TIPS is adjusted, but that is incurred as a tax in the current year. Thus one can not compare this product directly to TIPS given the tax deferred nature of this product.
You should hold your TIPS in a tax preferred account to avoid the phantom income.

That's what we do for our LMP individual TIPS ladder.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Stinky »

ivk5 wrote: Tue Apr 13, 2021 3:44 am Have appreciated posts here exploring the topic (Stinky's as well as this thread).
HueyLD wrote: Tue Apr 13, 2021 10:59 am Fantastic recap of MYGA investing. Thank you Mr. Stinky.
bhough wrote: Tue Apr 13, 2021 11:22 am Dear OP and "Stinky",
You have changed my mind. Thank you for your helpful information.
PaulieLilly wrote: Tue Apr 13, 2021 12:01 pm I'd also like to thank Stinky (and others) for all the MYGA insights.
I'm flattered and humbled by the kind words. Thank you so much.

I believe that MYGAs offer considerable value for the right kind of "fixed income" investor. Yes, there are caveats that need to be noted, just as there are with any kind of investment. And there's no guarantee that the attractive competitive position of MYGAs will remain in place for the longer term.

But, at the current time, MYGAs offer an attractive interest rate for a defined period of time, without market value risk to the principal so long as it is held to the end of the term. That's the basic value proposition.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by gjlynch17 »

watchnerd wrote: Tue Apr 13, 2021 12:59 pm
I can take that same money that would go into an MYGA and build a TIPS LMP ladder for myself, instead.
Break-even inflation rate between 5-Year TIPS and the highest paying MYGAs is approximately 4.5%. Built in to this break-even rate are credit premiums and illiquidity premiums for MYGAs so it is not an apples-to-apples comparison on inflation. MYGAs have tax deferral benefits if held in ataxable account. TIPS, despite their "phantom income" have the tax benefit of no state income taxes.

Ultimately, it comes down to an investor's preference and risk tolerance when constructing a fixed income ladder of MYGAs, CDs, TIPS, nominal treasuries, CDs and bulletshare ETFs. Personally, I find MYGAs attractive in the current environment as I am building out my fixed income ladder for my retirement in a few years.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by investnoob »

Stinky wrote: Tue Apr 13, 2021 11:51 am
investnoob wrote: Tue Apr 13, 2021 11:37 am If it is a multi-year fixed annuity why is the acronym MYGA instead of MYFA?
Multi year guaranteed annuity. MYGA.

I’d imagine that some marketing person from the distant past thought that “MY-gah” sounded better than “MY-fah”. To me, MYFA sounds like a dangerous disease. :D
LOL! Thank you.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by ThisTimeItsDifferent »

Stinky wrote: Tue Apr 13, 2021 11:04 am
VTI wrote: Tue Apr 13, 2021 10:54 am
jeffyscott wrote: Tue Apr 13, 2021 10:09 am
VTI wrote: Tue Apr 13, 2021 12:55 amThey are guaranteed both by insurance companies and by state governments.
They are not guaranteed by state governments. A State Guaranty Association is not the state government.

Guaranty associations are state-sanctioned, nonprofit organizations that insure consumers in the unlikely event that their insurance companies fail and default on their payments. Insurance companies, which issue annuities, are legally required to belong to their particular state’s guaranty association.
https://www.annuity.org/annuities/regul ... ociations/
Thank you for the clarification. I have a couple of questions, neither of which are meant to sound hostile:
  1. In practice, are there any ramifications for this distinction?
  2. Should one make the same distinction regarding FDIC insurance?
1. Guaranty associations are not supported by state government tax revenues, nor are they an agency of the state government. When an insurer insolvency happens, the Guaranty Fund assesses member companies in proportion to their share of premiums written in that state. It is "post-funded"; that is, funds are gathered only after an insolvency happens.

2. The FDIC is an agency of the Federal Government. Per the following website, it does not receive Congressional appropriations. Its income is from premiums from banks and savings associations, which I assume are "prefunding" possible future losses. While I guess the FDIC's funds could be exhausted in the event of massive bank failures, I note that its parent, the Federal Government, has the power to both levy taxes and print money. :D https://www.fdic.gov/about/what-we-do/i ... 20coverage.
FDIC insurance, or at least the FDIC financial assets backing that insurance, is US government backed and very safe but might not have quite the same full faith and credit backing as Treasuries, https://www.finra.org/investors/learn-t ... securities which may not be repudiated or impaired by any law.

The Fourteenth Amendment states:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

Treasuries are the public debt so far be it for me to question them.

Current law gives the FDIC borrowing authority of up to $100 billion from the Treasury https://www.congress.gov/bill/111th-con ... e-bill/896.

That does not mean that the deposit insurance terms themselves have the same full faith and credit but the FDIC can borrow from the Treasury and Treasury debt would have the US full faith and credit.

These opinions say that the insurance itself does not have the constitutional full faith and credit
https://www.fdic.gov/regulations/laws/r ... -2660.html
https://www.fdic.gov/regulations/laws/r ... -1600.html
https://misunderstoodfinance.blogspot.c ... by-us.html
https://business.time.com/2009/08/27/th ... ance-fund/

even if the FDIC says:
FDIC insurance is backed by the full faith and credit of the United States government.
https://ask.fdic.gov/fdicinformationand ... ation-FDIC

To be clear, I don't think anyone should worry about FDIC insolvency or FDIC insurance going broke or not honoring the insurance terms, but it is not quite the same as Treasuries themselves. For another, the payment stream from Treasuries is guaranteed but not the payment stream or interest rates of FDIC insured accounts.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by peke9898 »

How one go about buying MYGA in MA?
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Stinky »

peke9898 wrote: Wed Apr 14, 2021 4:29 pm How one go about buying MYGA in MA?
There are a number of online sources.

Go to blueprintincome.com or stantheannuityman.com. You’ll see a number of companies and products shown - over 100 products available in Massachusetts. You’ll also be able to get some basic education on the product.

Another site to check out is Gainbridge.life. The rates posted there are higher than most rates available elsewhere.

You can research and buy totally on line, if you’d like. Or call up a human for assistance.

Post back with questions.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by ImUrHuckleberry »

peke9898 wrote: Wed Apr 14, 2021 4:29 pm How one go about buying MYGA in MA?
Search for Stan the Annuity Man. (I have no affiliation - I just happened to be researching these last year, and people on this site recommended starting there and it was helpful)
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by abc132 »

Using bonds for just rebalancing and accounting for a 50% drop:

% of fixed income in MYGA = half your bond% + 50%.

90/10 needs 10/2+50 = 55% MYGA (55% of the 10% fixed income is MYGA) = 5.5% of portfolio is MYGA
60/40 needs 40/2+50 = 70% MYGA (70% of the 40% fixed income is MYGA) = 28% of portfolio is MYGA


I don't plan on doing this, because any product that can't be clearly defined could easily be mortgage backed securities all over again. I'll stick with 3%+ CD's, I-bond, EE bond and then treasuries. For me, there is no point in taking risk for this portion of the portfolio.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by SnowBog »

Thanks OP and Stinky! I'm not sure these are for me at the moment, as I'm looking for options I can access before 59.5. But appreciate the info!

Might need to rethink my tax-deferred bonds someday...
bhough wrote: Tue Apr 13, 2021 2:43 pm I bonds beat MYGA hands down, but one can only buy $10,000/year of I bonds. This could be a useful too in building a LMP if you will be in a lower tax bracket in 10 years.
Just for clarity if people find this thread and aren't aware of I Bonds... I Bonds (like TIPS) adjust every 6 months to follow inflation.

The $10k/year limit is per "person", so a married couple can purchase $20k combined. You can also get $5k back from overpaying taxes as a refund (in paper bonds). And if you have a trust, you can buy another $10k through the trust.

For us, married each with a "living trust", that's $45k of I Bonds we can purchase each year. (And we could do $40k of EE Bonds, which have a potential effective rate of 3.5% in that they are guaranteed to double if held for 20 years.)
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by HootingSloth »

Is there any reason to consider MYGAs as compared to municipal bonds in a taxable account for someone with a high fed + SALT marginal tax rate, who is in their 30s, and who holds bonds primarily for liquidity? (I do also hold some bonds in tax advantaged accounts, but they are for rebalancing, and bonds in taxable are generally more advantageous in my personal tax situation).
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by Stinky »

HootingSloth wrote: Wed Apr 14, 2021 5:54 pm Is there any reason to consider MYGAs as compared to municipal bonds in a taxable account for someone with a high fed + SALT marginal tax rate, who is in their 30s, and who holds bonds primarily for liquidity? (I do also hold some bonds in tax advantaged accounts, but they are for rebalancing, and bonds in taxable are generally more advantageous in my personal tax situation).
MYGAs could potentially make sense for you if you can hold annuities for the very long term, deferring tax recognition of the interest for many years until you are in a lower tax bracket than you currently are. The calculation would be to compare the municipal bond yield to the expected after tax yield of the MYGAs, considering your future lower tax rate.

I personally would probably not take this approach. So many things can change over the next two to three decades. There’s no guarantee that MYGAs will maintain their current competitive position over the long term, and tax rates when you withdraw the money a few decades from now could be higher than today’s rates.

But that’s just my opinion. It’s your choice.

Remember that distributions from a taxable annuity before age 59.5 are subject to regular income tax, plus a 10% tax penalty.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by HootingSloth »

Stinky wrote: Wed Apr 14, 2021 7:27 pm
HootingSloth wrote: Wed Apr 14, 2021 5:54 pm Is there any reason to consider MYGAs as compared to municipal bonds in a taxable account for someone with a high fed + SALT marginal tax rate, who is in their 30s, and who holds bonds primarily for liquidity? (I do also hold some bonds in tax advantaged accounts, but they are for rebalancing, and bonds in taxable are generally more advantageous in my personal tax situation).
MYGAs could potentially make sense for you if you can hold annuities for the very long term, deferring tax recognition of the interest for many years until you are in a lower tax bracket than you currently are. The calculation would be to compare the municipal bond yield to the expected after tax yield of the MYGAs, considering your future lower tax rate.

I personally would probably not take this approach. So many things can change over the next two to three decades. There’s no guarantee that MYGAs will maintain their current competitive position over the long term, and tax rates when you withdraw the money a few decades from now could be higher than today’s rates.

But that’s just my opinion. It’s your choice.

Remember that distributions from a taxable annuity before age 59.5 are subject to regular income tax, plus a 10% tax penalty.
Thank you. That's very helpful. :beer
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by hudson »

Stinky wrote: Wed Apr 14, 2021 4:38 pm
peke9898 wrote: Wed Apr 14, 2021 4:29 pm How one go about buying MYGA in MA?
There are a number of online sources.

Go to blueprintincome.com
Thanks Stinky,

B++ MYGA for my state pays 2.8% for 5 years.
B+ MYGA pays 3% for 5 years
I wouldn't go over my state guarantee association's max.
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Re: Your bond fund should have barely enough for reasonable rebalancing. The rest of your fixed income should be in MYGA

Post by HueyLD »

hudson wrote: Thu Apr 15, 2021 10:09 am
Stinky wrote: Wed Apr 14, 2021 4:38 pm
peke9898 wrote: Wed Apr 14, 2021 4:29 pm How one go about buying MYGA in MA?
There are a number of online sources.

Go to blueprintincome.com
Thanks Stinky,

B++ MYGA for my state pays 2.8% for 5 years.
B+ MYGA pays 3% for 5 years
I wouldn't go over my state guarantee association's max.
For Commonwealth of MA:

“ Are all policies fully protected?

No. If your insurance company fails, the maximum amount of Guaranty Association protection provided for each type of policy, no matter how many of that type of policy there are, is listed below:

Life insurance death benefit: $300,000
Life Insurance cash value: $100,000

Health insurance benefits
$300,000 for disability income insurance and long term care insurance
$500,000 for basic hospital expense insurance, basic medical-surgical insurance, or major medical expense insurance
$100,000 for all other types of health insurance

Annuities
$250,000 in the present value of annuity benefits including net cash surrender and net cash withdrawal values. With respect to each payee of a structured settlement annuity (or beneficiary or beneficiaries of the payee if deceased) $250,000 in the present value of annuity benefits in the aggregate, including net cash surrender and net cash withdrawal values.

For any one life the Guaranty Association is not liable for benefits aggregating more than $300,000 , or $500,000 for basic hospital expense insurance. basic medical-surgical insurance or major medical expense insurance benefits.”

https://www.malifega.org/FAQ
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