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Money-market funds and savings accounts are liquid and stable, and can offer competitive rates. What’s not to love? Well, you could be earning more on your money elsewhere, especially now that money-fund rates have declined and may be heading lower.
While you need full access to some of your money to pay the usual bills and as a safety valve for surprises, such as an expensive auto repair or a medical bill, overinvesting in cash-equivalent funds has an opportunity cost. The key is to strike the right balance.
Most fixed-rate annuities and bank certificates of deposit (CDs) yield more than cash funds — sometimes much more — and the rate is locked in for the term. But many people hesitate because they’re leery of tying up their money. Some may believe that rates will be higher next month or next year. But delaying costs you.
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Committing now can put you ahead
Let’s say you put $100,000 into a seven-year fixed-rate annuity — that is, a multi-year guarantee annuity (MYGA) that yields 6.30%, an annuity rate available as of early April 2026. Since that rate is set for seven years, you’re guaranteed to have an account value of $153,367 at the end of the term, assuming no withdrawals. If you don’t take any money out, all of your interest is tax-deferred.
Suppose you put your money in a savings account yielding 3.75% instead. (A year ago, you could have gotten around 5.00%.) If rates stay the same on average — they likely won’t — after two years, you’d be behind the annuity by $5,356. After seven years, you’d be behind by $23,972. If you chose to move the money into the annuity at this point, you could still come out ahead, but only if the rate on the annuity went up substantially over the next two years. To achieve the same value at the end of seven years, you’d need to find a five-year annuity paying 7.33%. I suspect that’s not realistic.
Most annuities give you penalty-free access to some of your money
While fixed-rate annuities never give you quick access to all your money, you’re not usually locking all of it up for the term. Knowing this can be reassuring. When you buy an MYGA, you usually have unpenalized access to some of your funds.
However, if you take withdrawals beyond what’s allowed by the contract, you will pay a penalty. By understanding the surrender period and choosing annuities that provide sufficient access to your money, you can avoid surrender charges.
For instance, let’s say you have a seven-year MYGA that lets you take out 10% of the annuity value without penalty each year after year one. The surrender charge for the amount above 10% might start at 9% in year one and decrease by one percentage point each year after that.
Most annuities also levy a market-value adjustment (MVA), which essentially acts as an extra charge that can apply to early withdrawals if interest rates have gone up since you purchased the annuity. If there’s a big rate spike, the MVA could dwarf the surrender charge. So, there’s a big incentive to avoid withdrawals that exceed contract limits. There are MYGAs without MVAs, but they may yield less.
Most products let you at least receive interest payments without penalty. While 10% annual penalty-free withdrawals are common, some annuities may allow less, such as 5%. A few don’t allow anything.
Look before you leap
Make sure to understand liquidity limits before you buy. Sometimes you can get a higher withdrawal percentage in exchange for a slightly lower rate. That can sometimes be worth the peace of mind and greater financial flexibility. If the annuity is in a traditional IRA, you may want sufficient penalty-free withdrawals to cover your required minimum distributions (RMDs), which start when you reach age 73.
Some annuities have enhanced withdrawal provisions (living benefits), which waive penalties if you need to withdraw money for events such as an extended nursing home stay or a terminal illness.
Any interest you receive from a non-qualified annuity (one that’s not in an IRA) counts as taxable income, and if you’re younger than 59½, it’s also normally subject to a 10% IRS penalty. This is one reason most people don’t consider annuities until they’re in their 50s.
It doesn’t make financial sense to avoid longer-term fixed-rate annuities when interest earnings can be dramatically improved over cash equivalents. But many people can’t see their way to committing in full now.
Half now, half later?
If you’re uncomfortable about locking in today’s rates, use a strategy of half now and half later. Allocate today half of the funds you’re considering for fixed-rate annuities. Set aside half in case rates increase in the near future.
Meanwhile, millions of sidelined investors are throwing away lost interest earnings every day. Many of these investors have already been waiting for a long time and have lost out on a lot of potential income.
Financial decisions are often emotionally driven rather than data-driven. But the data paints a clear picture. It’s almost always better to commit to a MYGA today rather than wait for some hoped-for future interest rate that may never come.
At the start, I wrote that the key is to strike the right balance. How do you do that? Your circumstances are unique and need to be analyzed to decide what’s right for you. This includes looking at the numbers and being frank with yourself about your risk tolerances and preferences.
After you think it through, you may find you can commit more of your money than you thought to longer-term vehicles.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income-annuity quoting service. There are no fees or charges for the firm’s services; 100% of the client’s money goes to work for them in their annuity.