Secondary Market Annuity - is it for you?

Lets start with understanding what annuity means. An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. The insurer, in return, commits to make periodic payments beginning immediately or at some future date.

Now lets understand the secondary market. A secondary market is one in which an investor purchases a financial asset from another investor rather than the issuer, subsequent to the original issuance in the primary market.

Lump them together and you get some idea of what secondary market annuity means. In this article,we will focus on the simplest kind; an annuity that guarantees a fixed payout for a fixed time period.

why should you consider an annuity...simply put, it guarantees fixed income. Interest rates will go up and down, bond yields will vary, stocks will fluctuate but an annuity income once guaranteed and in contract with the insurance company is set in stone. You are pretty much guaranteed the cash flow.

why secondary market...only 2 basic reasons. First, there is a seller who is desperate to sell at a discount. Second, for every seller there is a buyer eager for a higher ROI. Of course, the underlying assumption is that the average interest rate on a secondary market annuity beats all other investment options for the same period. The insurance company does not reset the contract to a higher interest rate, its simply that you purchase it at a discount from the original buyer for an effective higher interest rate.

what are the risks...any investment is as good as the strength of the insurance company backing it, so the stronger the credit rating and stability of the insurance company, the better off you are. Another consideration is your own outlook on future interest rates. If you expect CD rates, bonds, regular annuities to provide better returns in the future, you need to evaluate the secondary market offering for a like to like comparison. If you are investing with foreign funds, exchange rate fluctuations need to be factored in and last but not the least is the fact that the funds you invest will NOT be available to you. This is not an investment that you can liquidate easily. Only funds that you do not ever intend to use should be invested.

this is complicated, how can one get more info...Mr Andrew Murdoch from Somerset Wealth Strategies was my guide to understanding this complex investment vehicle. I am sure he can be of help if needed. Also the following web sites.

Additional Info:
http://www.annuityfyi.com/what-is-secondary-market-immediate-annuity.html
http://www.businessweek.com/magazine/content/06_19/b3983097.htm
http://www.freeannuityrates.com/annuities/article.php?title=Secondary-Market-Annuities-Explained

How much should I save?

Saving money is neither a new concept nor one that needs too much discussion but the fact that its the least pro-actively planned budget item is mind-boggling. Saving is just as important a budgeting item as anything else and should be a line item in any budget rather than being the number that remains after all other budget items are accounted for. The logic behind this is simple as brainstormed below...

control your spend...simply speaking, check and double check your monthly budget. There are must have "needs" like rent, insurance payments, grocery, fuel, utilities and there will be "wants" electronics, new clothes, eating out, movies etc. If Saving is not in the "needs", begin by listing it there and assigning a target $ value to it. The best way to save is to wisely spend and put off at least by 24 hours anything that is not on your budget list.

target $ value for saving...every one's economic scenario is different. Some have saved in the past so have something to fall back on, some have utilized it all in the downturn and some have yet to embrace this idea. Rule of thumb simply is "as much as you can". Yes, save the maximum you can every month till you have about 12 months of reserves. Reserves would be your monthly budget for all your "needs" times twelve. This would be a healthy number. Alternately if percentages are your thing, most recommendations are for 20% of your pre-tax income but at least 10% for sure. Getting to that reserve target will take time but the inner peace and confidence that it provides is awesome.

saving tricks...there are several methods people can adopt such that they save automatically which means the money is never with them in the first place to re-direct into a savings account post budgeting. One of them is directing a portion of your salary pre-tax directly into your 401k, second is to direct a portion of your salary into an IRA account, third could be to direct a fixed sum every pay check into a savings account, fourth could be a direct deposit into an education fund (if you are saving for college).

don't save to be a millionaire...almost every article or discussion ends up calculating how much someone should save at what age and how long and at what annual return to save up to a million. I have never understood the fancy for this target. Saving has a higher purpose than that. It is to provide for your needs when you need help. It is to provide you peace of mind that if things go south, you can depend on it. It is to allow you to buy things and have vacations or share gifts with your loved ones if you choose to do so.

Lastly...Saving is the same as dieting. Do not go overboard else you will lose interest or suddenly splurge on fatty items breaking the discipline and long term goal. Keep it steady and only to the point that you do not feel strangled in your own saving plan. The idea is to enjoy life continuously and be prepared...