Selling an annuity?
November 28, 2005 10:10 PM   Subscribe

What advice/information can any of you guys give regarding selling an annuity? I have a six-figure annuity sum due in about 2.5 years, but I could definitely use the money now for moving to NYC for graduate school. I wouldn't need to recieve the entire amount immediately, or, the entire amount minus whatever commission/percentages taken by the agency. I would actually prefer a low 5-figure sum to get on my feet in NYC and establish good credit, pay off loans, etc., and then whatever schedule that was determined to be prudent afterwards. Are there any banks, companies, agencies that would be recommended? Pitfalls I should watch out for? Am I potentially making a financial blunder?
posted by oog to Work & Money (10 answers total)
I don't have a direct answer, since I am not American and the available financial products vary wildly from country to country. But I would advise you to consider (mathematically) your options (perhaps talking to a financial expert - who may be your bank manager, if you have one). You could, for instance, try to obtain a loan using the annuity as a guarantee. There may be other good options and some may be cheaper than simply selling the annuity at a discount.
posted by nkyad at 6:11 AM on November 29, 2005

The value of an annuity *now* tends to be lower than the accumulated value of the payments, so although you say that you have a six-figure sum coming, they may adjust the payment down if you take it all early...
posted by Chunder at 6:19 AM on November 29, 2005

This might go without saying, but the companies that advertise on TV that they will give you "CASH NOW" probably pay pretty badly.

That said, you should also look into getting some student loans if you are going to grad school. The interest rate on them is so low, you will definitely come out ahead if you just pay them off when your annuity pays off.
posted by MrZero at 6:35 AM on November 29, 2005

Unless you're talking about a professional school, or about going to a public school in a state with restrictive laws about it, you shouldn't go to any graduate school that's not paying your tuition and an austere but liveable-in-a-cheap-town stipend. It's the good people at good programs who aren't hampered by endless extraneous work who get done quickly, impress people, and get good jobs.

I am not a financial advisor. But your plan seems expensive to me. You want to convert an annuity into a lump sum, at which point the firm doing this will extract a profit from you. Then you want to convert some/most of it back into an annuity, at which point that firm will extract another profit from you.
posted by ROU_Xenophobe at 6:49 AM on November 29, 2005

An annuity is a yearly payment, so I have trouble understanding an annuity that supposedly comes in a single lump sum 2.5 years hence.

You need to read about "time value of money". Google that, check out a library book on it, or get a friend of yours that knows money to explain it to you. Put some effort into it - with a six-figure sum in question, understanding this will be worth thousands of dollars to you, so imagine you're paying yourself thousands of dollars to learn this concept.

There are formulas for converting from a series of payments to a lump sum and vice versa at particular interest rates. You need to understand what is going on or else you're pretty likely to get moderately bamboozled in the process of extracting money now from a future expected income.

You could also purchase an HP12C financial calculator to do the calculations for you, but unless you understand what is going on you will not understand the results you get.
posted by jellicle at 7:00 AM on November 29, 2005

Get a loan instead.

As far as I know, the main way future payouts get converted into present cash is by selling the investment to someone who has more patience. They give you money upfront, and you sign the investment over to them -- they then wait the full period and receive the total value of the investment.

Consequently it's unlikely they'll be interested in the more complex transaction you're proposing. They'll want to give you some fraction of the total value, and then have you go away. By making the transaction more complex, you'll be increasing their costs -- which they'll extract from you by decreasing the money you get.

Cashing out a structured settlement or bond is usually something done in desperation, because typically (?) you'll be throwing away a lot of money. Consider, for example, the lottery -- they pay 100% of the jackpot over 20 years. If you want it all in cash now, they pay you on the order of 50% of the jackpot. The remaining half gets forfeited.

Finally, the fact that only desperate people do these things means you'll get even less money. The folks doing the conversion for you know you're desperate, they know you need money, so they'll keep more of it for themselves.

Get a loan instead.
posted by aramaic at 7:24 AM on November 29, 2005

2.5 years? Student? Shouldn't you get a lower interest loan than what you're annuity is paying? Look at the PV of money and figure out how much it would cost taking out loans and paying them in 2.5 years vs taking out the annuity. Even a few points can be several thousand dollars saved at least. You need to talk to a financial advisor. As others said people do this in desperate situations, your best bet is to pretend that money isn't even there unless it's in-the-gutter desperate.
posted by geoff. at 8:21 AM on November 29, 2005

Contradicting nothing above regarding financial aid, I think you might do better than suggested above in selling your payment right, if you still need the money after all other sources are exhausted.

The rep that payment-rights buyers get for terrible pricing results from most of the sellers being stupid, desperate, or both. If you're neither stupid nor desperate, you can get them into a bidding contest and get yourself pretty good pricing.

It's never going to be cheap, but it could easily be better than (for example) borrowing the cost on your credit card and paying off the balance when your payment right matures.

(It's also important that the payer be highly credit worthy -- a government agency, an A-rated insurer or something comparable. Pricing deteriorates fast when you start getting into less gold-plated obligors.)
posted by MattD at 9:22 AM on November 29, 2005

If I were a computer program, here's how I would do it -

1) Get quotes from financial institutions interested in buying your annuity

2) Find out how much your annual interest rate would be if you borrowed money

3) Get a financial calculator (or crunch the numbers yourself) and plug in these numbers:
Assuming your entire annuity will be given to you in 2.5 years.
PV = [quote from annuity buyer]
N = [number of years]
FV = [amount of money you will get in 2.5 years from agency]
PMT = 0
I = < -- solve for thisbr>
4) If 'I' from 3 is greater than 'rate' from 2, borrow the money. Else, sell the annuity.
posted by lpctstr; at 12:21 PM on November 29, 2005

Yeah, I would say get a loan as well. In theory, you could put up the Annuity as collateral in order to get a better rate.

If you can get a federal student loan (with almost no interest) you'll be even better off.
posted by delmoi at 12:26 PM on November 29, 2005

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