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Impacts of Long-Term Investment in High Interest Rate Environments

Jan 18, 2023

Blueprint Income Team

Exploring investment choices

Over the last 18 months, we have witnessed a highly elevated interest rate environment, leading to financial market volatility worldwide. Fixed income investors are faced with the dilemma of choosing between cash, multiyear guaranteed annuities (MYGAs), and CDs. In this article, we explore the advantages and disadvantages of increased interest rates and their potential impact on investment decisions.

Over the past decade, the United States experienced massive economic expansion, largely due to a very low interest rate environment. This allowed many households to indulge in extravagant spending on homes and vehicles, with borrowing rates remaining low and money supply flourishing. However, recent years have brought stock market volatility and higher interest rates, impacting short-term economic conditions and retirement outlooks. Alongside economic turmoil, even the traditionally "safer" bond market has struggled with rising interest rates, raising questions about safe asset classes.

The Resurgence of MYGAs and CDs Amid Rising Interest Rates

MYGAs and CDs have experienced surges in sales as rates have risen. Some investors have sought short-term instruments to weather the storm, benefiting from higher rates on fixed products. Others have opted for longer-term strategies, securing their financial future as interest rates climb to levels unseen since 2008. This article aims to discuss the distinction between short and long-term investing to educate consumers on making the right choices for their situations.

While rising interest rates may affect economic growth, they also present opportunities. In the late 2010s, fixed income investors struggled to find instruments yielding 1 or 2 percent, but today, many investors earn 3 to 4 percent on savings. The economy has grappled with inflation due to excess money supply, leading to rising yields over the past 18 months. As inflation stabilizes, investors are seeking shorter-term yields while short-term rates remain historically high. However, should we consider the longer term?

10yr Treasury Yield Chart

Source:Yahoo Finance

The graph above illustrates the 10-year treasury yield over the past decade, showing historically elevated rates since the economic meltdown in 2008. While history cannot predict future performance, it can guide investors in deciding whether to lock in rates for the long term. As previously discussed, MYGAs and CDs have seen increased volume recently. Let's shed light on the differences between the two and when each might be a better choice.

Short vs. Long-Term Investment Strategies: Making Informed Choices

CDs are short-term cash alternatives offering guaranteed interest rates for set durations, typically ranging from 1 to 5 years. They can be issued by banks and credit unions, with two main types available: brokered CDs and traditional bank CDs. The key difference is that brokered CDs tend to have longer durations, and some may be callable before maturity. Callable means the brokerage firm can take back the CD before maturity if rates decrease. Not all brokered CDs are callable, so consumers must understand the terms at the time of investment. CDs are considered investments but fall more in line with savings vehicles as they do not offer tax deferral unless funded with qualified assets.

On the other hand, MYGAs are longer-term investment vehicles that create contractual obligations between individuals and insurance companies, offering guaranteed rates for specified terms, usually ranging from 2 to 10 years. Some MYGAs may have longer terms. A primary advantage of MYGAs is the built-in tax deferral on non-qualified savings, giving investors control when making taxable distributions. This advantage makes MYGAs more of an investment than a savings vehicle. Historically, MYGA contracts have offered higher rates during inflationary times, thanks to rising interest rates in short to longer-term treasuries. They provide safety of principal and guaranteed yield during inflation. Additionally, most MYGA contracts offer compounding interest and tax deferral, allowing consumers to benefit from enhanced growth not found in CDs or savings accounts. Annuities serve as good bond alternatives as there is no secondary market, ensuring their value can only grow regardless of market conditions.

The decision between CDs and MYGAs depends on individual risk tolerance and economic outlook. Clients also want to keep in mind that MYGA contracts are designed as long-term investment vehicles and liquidity can be limited especially for individuals who are under 59 ½ and subject to a 10% federal tax penalty for early distributions. Short-term CDs can be a safe option during rising rates, providing guaranteed rates and safety. However, as inflation subsides, annuities should be considered carefully, as historical trends show falling interest rates in such scenarios, making longer-term guarantees harder to find. In times like these, longer-term MYGAs can prove valuable for investors, offering the combined benefits of safety, compounding interest, and tax deferral, providing control over taxable distributions in the future. Opting for short-term agreements when inflation subsides may lead to interest rate risk and poor rates upon expiration. Locking assets into longer-term guarantees can mitigate interest rate risk and offer a higher level of guaranteed interest or income for the future.

While CDs serve as excellent savings vehicles during short-term rising interest rates, it might be an opportune time to lock in higher rates for longer periods with annuities. If inflation continues to fall, rates may follow suit, providing a unique chance to secure longer-term rates for peace of mind and enhanced yield in retirement. Blueprint Income is here to help guide the conversation and assist you in choosing the alternative that best suits your situation.


Blueprint Income Team

We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.


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