Ask Mr. Annuity: Secondary Market Annuities Are a Solid and Sensible Investment Option

Stock market fluctuations in recent weeks have underscored the importance of having solid and secure investments for the retirement years. In this edition of the Ask Mr. Annuity program, Steve Lance and Jeff Dorfman explain how an investor, retiree or not, can find get guaranteed returns on investments at good interest rates in secondary market annuities.

Steve points out that secondary market annuities provide a relatively high rate of return. An investor can get a good deal financially by investing in a secondary market annuity. Secondary market annuities (SMAs) are existing annuities that the initial annuity beneficiaries have chosen to liquidate. Very often, an annuity beneficiary will encounter a problem that requires some immediate cash rather than long-term payments. Some SMAs are immediate annuities that the owners have chosen to sell for cash. The sellers might also be lottery winners or personal injury victims who got structured settlements.

Companies like J.G. Wentworth advertise to purchase annuities and turn them into lump sums of cash. The seller gets a lump sum payment, less a discount to the buyer, and the buyer of the annuity then has an existing annuity to sell. The payment terms and interest rate are already established. The interest rates on these annuities typically are in the four-to-seven-percent range. The result is that guaranteed annuities backed by big companies are available for purchase by investors.

As an example of the kind of SMA that may be available for purchase, Steve discusses an SMA issued by GE Capital. This particular SMA has a purchase price of $199,000. But the return on investment is great. A purchaser would receive 188 payments of $842 each month, plus a $25,000 lump sum of cash. This annuity starts payments in October, 2017. Someone two years from retirement who wanted an income stream could convert an IRA or 401(k) account—or even a savings account—into this SMA. The rate of return is about 4.8%.

Steve points out that this is a great rate of return in an economy where interest is almost nonexistent. Steve adds that this particular SMA features a 3% cost-of-living adjustment (COLA). This SMA would provide payments for sixteen years, a total return of $372,000 on the investment of $199,000. Jeff notes that the COLA is not always a feature of investments, but this is a very desirable feature to have. This particular SMA almost doubles the cost of investment over the course of the payouts. The Ask Mr. Annuity website includes a listing of SMAs that are currently available for purchase.

Steve says that SMAs can be a good investment for anyone, including people in their forties who are years away from retirement. Some of these annuities do not begin payments for twenty years, so they would be very good investments for someone wanting to plan ahead for retirement. Jeff and Steve also point out that they purchase annuities themselves. So someone with an annuity who needs cash can contact them (call them at 866-551-2522) to arrange to convert the annuity into cash.

Steve also mentions an SMA from The Hartford available for $76,000 that pays a 4.25% interest rate. This SMA has 204 monthly payments of $569 starting in two years. The total return would be $116,076. This would be a good investment for someone who is 63 and wants to arrange for an income stream to start at retirement. This is a good rate of return and is a great addition to a portfolio that includes equities and bonds.

Steve Lance has been a teacher, a financial analyst for GE Capital, and is the author of "Annuities: The 21st Century Pension Plan." Steve Lance along with his co-host Jeff Dorfman ask and answer questions each week that are the concerns of today’s savers retirees on  Ask Mr Annuity. The Financial Network is a featured network of Sequence Media Group.