Retirees Looking For Higher Yield Safe Money Options - How About 6%

Dec. 20, 2011 - PRLog -- The current low interest rate environment has been especially problematic for retirees. This segment of the population has traditionally avoided stock market volatiltiy and placed the majority of their money in CDs and other similar guaranteed options.

With the Federal Reserve keeping interest rates artificially low, what occurs is effectively a "tax" on retirees. With the effort to stabilize markets, this policy is taking a toll on those living on fixed income and no stomach for risk - retirees. With no ability to generate a decent return, many seniors are having to dip into principal to cover the shortfall of their Social Security Benefit and pensions. With no end in sight, retirees are now actively looking for alternatives.

Although many low risk options exist, guaranteed options are hard to come by. That is why there has been increasing interest and activity in the retail structured settlement marketplace. Secondary purchases of Structured Settlements have been an attractive niche for institutional investors for decades but with low interest rates for so long the retail market has found them as well.  

A Structured Settlement is a created when the proceeds of a lawsuit are designed to paid out over time to a claimant. This involves the funding of a guaranteed income annuity issued by an insurance carrier.

During difficult economic times, many of these claimants sell out their interest in guaranteed future payments for up-front cash today. In many cases, they sell out their interest at a deep discount. There are many companies aggressively advertising to reach those individuals that are receiving these settlements.    

Although most of this inventory is pooled and then purchased by institional investors, there are several retail distributors that make individual pieces available for individual investors.

The benefit to the individual is that they are able to purchase a guaranteed income stream at a discount. The discount rate ranges between 4-8% depending on the individual piece of inventory and although they vary dramatically in size, the average purchase is around $75,000.

The purchase of a Structured Settlement involves a friendly court hearing where the assignment of cash flow is diverted, at the insurance carrier level, from the claimant to the investor. The transaction is secure as it must be court approved and the diversion of income is ordered by the court..

There are many retirees that need income from their investments to simply get by. A Structured Settlement provides guranteed income. The investor will also be earning an internal rate of return (effective rate) of about 6%, compared to around 1% in comparable safety.

The drawbacks to purchasing a structured settlement are:

1. Lack of Liquidity: The investor is purchasing a discounted income stream. There is no liquidity.

2. Limited Inventory: Structured Settlement purchases represent a secondary purchase of a product that already exists. They are not "created" new. An investor can only obtain one that is offered for sale. When each one is purchased, it is gone.

As long as interest rates remain low, Structured Settlements will be an attractive safe money option.

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Seeman Holtz is a national leader in comprehensive post-retirement financial planning. We incorporate a formal client service platform that is centered on the main financial concerns of retirees.