My Thoughts: Last month I posted about having stock positions in your retirement portfolio and how much was appropriate. This post is about another option where there are no stocks at all, only a promise by an insurance company to return all your money to you, over time, at a guaranteed rate of interest. Typically, the rate of return, of ROR, is 4% or more, which in today’s world is pretty good.
The are called SMAs and are discounted receivables. Somebody (an insurance company) has agreed to pay someone else a series of payments for a specified period of time. The contract that makes this happen is an annuity, where the payments are guaranteed. The difference is that the initial recipient of these payments has changed his mind and instead, wants a lump sum and not monthly payments. So that person sells the future stream of payments to another person in exchange for a lump sum. This new person sees all this as an investment, so he/she in turn finds someone who has a lump sum but would rather have a stream of unbreakable payments. Ergo, Secondary Market Annuities.
If you, for example, own your house and have some money sitting in a bank somewhere that is earning very little, you might consider using that money to buy a favorable stream of future payments, where the return on investment (ROI) is much better than what the bank is paying you.
How Do SMAs Work?
Secondary Market Annuities are not what you would normally associate with the term, “annuities.” Annuities tend to be more complicated – involving contracts with riders, contractual terms, guaranteed rates, variable indices, and a host of other terms. By comparison, the purchase of an SMA is quite simple.
The easiest way to explain SMAs is with an example case.
Using today’s SMA yields, you can purchase a 10 year SMA case for $91,656 that begins to pay $1,000 per month for 120 months beginning on June 1, 2016 and ending on May 1, 2026. This SMA offers a guaranteed payment stream with definite dates of payment. To determine the purchase price, SMA Hub, the provider of choice, applies a discount rate to those payments, and the result is the purchase price today.
Comparing Apples To Apples
The real value of an SMA comes to light when you compare this SMA to a period certain annuity, such as a 10 year Single Premium Immediate Annuity (SPIA).
If your goal as a member of the public is to have a check every month of $1,000, you’ll find that if you purchase a SPIA with the same 10 year guaranteed income stream, it will cost about $110,254 based in today’s rates.
In our example here, if you can find an SMA to provide $1000 per month for 10 years, would you rather spend $91,656 or $110,254 to achieve the same outcome? You’ll pay roughly 20% less, provide you with the exact same income stream, and comes to you from a very high credit quality insurance carrier.
Each SMA case is like a unique, rare gem. While they are not too good to be true, they are one of a kind. Each case is offered for sale and once sold, it is gone. I have access to a weekly inventory of what is available. Talk with me if you want to further explore this idea.