In today’s interest-rate environment, it can be challenging to find investments that generate predictable income with competitive yield.
One option that has worked well for many of our clients is investing in structured cash flows. Structured cash flows can provide steady income with strong returns, and are flexible enough to tailor to your specific needs in retirement planning or other areas.
Structured cash flow investments involve the beneficiary of a fixed income stream—such as a pension, an annuity, even a lawsuit settlement or lottery prize—selling his or her rights to the income stream at a discount, in exchange for a lump-sum payment.
Because of that discount, the investments can provide higher rates of return than traditional income products such as annuities, bonds, and certificates of deposit. Naturally, discount rates can and will change over time. The current effective rate for a 10-year structured cash flow is more than 8%, compared with a 10-year single-premium immediate annuity offering 2.25% or a 5-year CD paying 1%.
In terms of flexibility, investors can select the amount of monthly income desired, the preferred level credit risk, and the term, such as 3, 5, or 10 years. Because of this flexibility, structured cash flows can work especially well within an overall retirement plan.
Let’s look at an example involving a structured cash flow derived from federal pensions. Our retiree invests $100,000 and selects a term of five years. The discount rate is 6.5%. For that lump-sum investment, the retiree will receive $116,263 in monthly payments of $1,937.
Investing that same $100,000 for a 10-year period in a federal, state, or large-corporate pension program could raise the discount rate to 8% and result in total income paid of $142,909, which breaks down to $1,190 per month.
As with any investment, structured cash flows involve risk. The first risk is lack of liquidity: Structured cash flows must be held to term. During that term, the interest rate and payment amounts are set—so you won’t be able to maneuver as the interest rates in the market change.
Institutional risks involve the payers of the benefits, such as federal, state, and local governments or corporate defined benefits plans. Finally, there is contractual risk, including attempted breach by the seller. Protections are available to offset these risks, which we are happy to discuss.
Please do not hesitate to contact us if you would like to learn more about how structured cash flow may fit into a lifetime income strategy for you.
