Q: I’m 66 years old, retired, and receiving Social Security. But the current interest rates on safe conservative instruments such as CDs, Treasuries, and so on, are so low that my principal can’t generate enough income for retirement without eating away at the assets.

In searching for a safe and dependable source of income, I’ve found an investment called secondary annuities, and I would appreciate your assessment.

Sincerely, Stretching 4 Income

$ ?s answered by Matthew Illian, CFP^®

Dear Stretching,

With one-year CDs paying less than 1% and 5-year Treasury bonds paying no better, many retirees are looking into unusual investments to juice up their incomes. Secondary annuities are just one in a long list of illiquid investments where the risks outweigh the rewards.

Secondary annuities (also known as factored structured settlements) begin when a stream of payments is awarded to someone as a result of a lawsuit, such as a personal injury award, or winning a state lottery. These people are then hounded by mailings and late-night television commercials suggesting, “It’s your money; you should have it now.” Some acquiesce and sell this income stream to a broker at a big discount.

Exercise great caution before purchasing what Jason Zweig calls a “high-yielding hunk of a lawsuit.”

You will be hard-pressed to find a more illiquid product. A 4 to 5% rate may look attractive now but not in the future where inflation may push CD rates to 7 to 8%.

Once you buy this product, you’re stuck. All structured settlement transfers must take place through a court order, which is both time and cost prohibitive. Many are illegal to resell. To believe you will not need access to this capital at any point seems like hubris to me. David Marotta is known to quip that investors too often underestimate the value of liquidity.

Sure, large insurance companies and other institutional investors have made a healthy business model from buying these settlements in bulk, but individuals should stay out of this market. Proper due diligence requires a legal staff to review these complicated contracts.

In their article “What Judges Should Know About Structured Settlement Protection Acts,” Daniel W. Hindert and Craig H. Ulman write, “Little controversy attended the development of structured settlements. Much controversy has accompanied the development of a secondary market, in which structured settlement ‘factoring’ companies acquire from settlement recipients their rights to receive future payments.” In other words, stay away.

This same advice goes for buying morbid life insurance viaticals or variable/fixed annuity resale. The best solution for maximizing retirement income is with an intelligently diversified portfolio of publicly traded stocks and bonds to provide both income and capital growth.

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