Essential information to accumulate prior to selling annuity payment

An annuity is a financial product that involves an individual and an insurance company (insurer). It represents an agreement in which an individual makes payments to the insurer. In return, the insurer pays the accumulated sum of money to individual after an agreed period of time. Types of annuities include.

  1. Fixed annuity: They are largely favored by individuals who are about to retire or have already retired. The insurer extends a fixed interest rate as well as a specified amount of periodic payments. An annuity holder is guaranteed of an increment in the cash invested in a fixed annuity.
  2. Variable annuity: The insurer gives an individual the freedom to invest annuity payments to varied investment options. The annuity payments gain value based on the performance of the investment option chosen.
  3. Immediate annuities: Individuals make a lump sum annuity payment to the insurer. Thus, an individual is assured of receiving income regularly throughout their lives or until the expiry of the agreed period.
  4. Deferred annuities: Deferred annuities simply translate into delayed income. They support individuals in their quest to garner a constant income in the future.

Selling options for annuities

In selling annuities, sellers are presented with several selling options such as partial and entire annuity selling.

  • Partial selling option: An individual might want to sell annuities without having to receive money immediately. Partial selling option serves this purpose. It enables annuity holders to sell annuities and receive the cash in future when it is needed the most. An individual specifies the duration of time- 5 years, 10 years- the annuity will be sold to a buyer. When the duration elapses, the individual is guaranteed of receiving the future payments.
  • Entire selling option: It enables annuity holders to sell annuities in a single transaction in its entire amount. An individual gets the full lump sum all at once. The annuity holder does not receive any other payment in future from the annuity.

How to Sell Annuity Payments

Annuity holders mainly trade their annuity payments for a lump sum. The most effective strategies for annuity holders to sell annuity payments is through annuity brokers, insurance agents and financial experts.

  1. Annuity brokers: Annuity brokers are used by insurance companies to facilitate sell of annuities on behalf of clients. They have a strong bias towards annuities. Their excellent skills allow them to traverse the annuity market sector successfully. They incorporate techniques such as commercial and online advertising on different media platforms to get the attention of buyers. They have the power to strike a good deal between buyers and sellers. However, sellers should be aware that the likelihood of incurring relatively high costs during the selling process is very high when using annuity brokers. In order to acquire quality services when using annuity brokers, individuals should conduct adequate research to find out the best to opt for.
  2. Insurance agents: Insurance agents are involved in marketing different financial products offered by insurance companies such as annuities. When annuity holders sell annuity payments by making use of insurance agents, they stand to accrue attractive monetary gains. Insurance agents are also associated with reputable insurance companies which enhances their credibility. In most cases, they do not ask for commission from the annuity holder since the buyers pay them commission.
  3. Financial experts: It is crucial to engage financial experts in selling annuities. Financial experts are better placed to assess the binding contract between the seller and buyer. They ensure the annuity holder is not subjected to unseen costs which can have a negative impact in future.

Sell annuity payment

Financial experts, insurance agents and annuity brokers are preferred in selling annuity payments because they are able to spearhead smooth transactions between sellers and buyers. In the process, they establish rapport between the seller and buyer leading to successful negotiations. They also keep up with emerging annuity trends. This enables them to help sellers make informed decisions. Apart from the full and partial selling option, they present an individual with multiple alternatives apart such as: multiple cash flow and multiple stage payout.

Reasons for selling annuities

  • To boost savings accrued over time because the cash is received in lump sum.
  • To generate security income flow for an individual after retirement.
  • To get capital to enable individuals to venture into the world of business.
  • To get finances to buy fixed assets such as buildings and land.
  • To acquire quick cash to deal with emergencies such as education and medical expenses
  • To be able to offset a bank loan without incurring a high interest rate charged when the loan is spread for several years.
  • To acquire money to explore multiple investments options in areas such as the commercial real estate industry.
  • To avoid decreased annuity value due to economic fluctuations such as inflation.

Top Facts about Structured Settlement That You Should Know

What Are Structured Settlements?

A structured settlement can be described as a negotiated arrangement where a personal injury victim agrees to resolve a legal claim by receiving parts of the compensation in the form of weekly, monthly, yearly or any other periodic payments. This is completely different to a situation whereby all the compensation money is paid once in a lump sum arrangement. Structured settlements provide a great plan for lifetime stream of income after successfully winning a lawsuit against an individual or a company that inflicted injury to your body. Wrongful death situations can also lead to legal claim for compensation that can be paid in the form of structured settlement. This arrangement provides financial security to the victim given that payments are paid on periodic intervals and are therefore not likely to be misused at one go. Even if the accident victim or settlement beneficiary misuses the claims from the first payments, there are more to be paid until when the entire agreed structured settlement amount is expended.

Can I Sell My Structured Settlement Payments?

Selling Your Structured SettlementYou have a right to sell your structured settlement payments if you are in urgent need of lump sum money. Emergency situations that require money right away can make you sell your structured settlement payments. For example, if your home burns down and you are in need of cash to build a new one and cannot wait for the periodic payments, you can opt to sell your structured payments for quick lump sum money. There are many tax benefits of selling your structured settlement.

The process of selling the payments is a bit complicated, but with a reputable buyer you can do it much quicker and easily. You will need to present your case of cashing out structured settlement payments to a judge and with the help of a structured settlement buying company, file all the needed paperwork in good time before transferring the payments. If the transfer goes through, the buyer will pay you the agreed lump sum amount and you will forfeit the remaining structured settlement payments to the buying company. You should be careful with the company you choose to sell your payments to; some are run by unscrupulous individuals who take advantage of unsuspecting sellers of structured settlement payments by giving them raw deals. For example, you should avoid companies that pass attorney and compliance fees to you after selling the structured settlement payments.

Choosing the Right Structured Settlement Company

Structured settlement companies provide a quick and reliable way for selling your periodic structured settlement payments for quick cash. Instead of waiting for the periodic payments to be channeled to your account after every month or year, you can sell the structured settlement payments to a reputable company for one huge lump sum payment. Since there is a regulation that requires the seller to see a judge before transferring the payments, it is important to get a top-notch buying company that will help you with the paperwork required for successful transfer. The regulation is intended at protecting you from crooked companies that are fleecing on unsuspecting settlement sellers. Choosing the best company to sell your payments to should not be a big problem. The right company should be certified and permitted to provide the services by both the local and federal governments. The best company to hire should also have a big clientele-base full of happy customers. Avoid companies that have previous clients complaining about the level of services or professionalism they got after selling their structured settlement payments. You should also avoid companies that do not have enough resources to make your selling successful. Here are some of the well-known companies that buy structured settlement payments.

  • JG Wentworth: JG Wentworth provides competitive quotes for structured settlement payments and is one of the leading buyers that also offer free consultations. The company also provides legal representatives to accompany you to the court before reaching an agreement on selling your structured payments.
  • Olive Branch Funding: With years of experience on financial matters, Olive Branch Funding provides quick cash for anyone looking for ways to sell their structured settlement payments. Like JG Wentworth, this company will help you file the legal paperwork to facilitate easy transfer of the payments.
  • SenecaOne: With their Headquarter in Bethsaida, MD, SenecaOne is one of the few structured settlement buyers that offer 100% free consultation by visiting their local offices. This company also provides online help for anyone looking for competitive prices for their structured payments.

Lastly, it is important to point out that there is need to do your own personal research to find out more about these companies before selling your payments. This will help you get the right buyer for your customized structured settlement payments.

Updates By Bengen and The Trinity Study

Obviously, 1994 and 1998 was some time ago.  But fear not.  These two articles have since been updated by their original authors.

In 2006, Bengen wrote a book called Conserving Client Portfolios During Retirement and revised his conclusions.  Rather than generically call it “the 4 percent rule”, he now refers to the minimum safe withdrawal rate as his “SAFEMAX” value.  It has been raised from 4.0% to 4.5%.  His revised strategy also calls for a more diverse portfolio.

In 2011, the Trinity Study authors also updated their research taking into account more recent market activity.  You can read the new article here.

Here is what the revised article concluded:

  • A retiree with a 75/25 stocks and bonds portfolio can now use a withdrawal rate as high as 7.0% for 30 years with a 91% success rate if they do NOT adjust annually for inflation.  If you have a 50/50 stocks and bonds portfolio and use a withdrawal rate of 6.0%, your success rate increases to 98%.
  • A retiree with a 75/25 stocks and bonds portfolio can use a withdrawal rate of 4.0% for 30 years with a 100% success rate if they do make annual adjustments for inflation.  If you have a 50/50 stocks and bonds portfolio, that same withdrawal rate will drop to 96% success rate.  Note that that’s 1% more than it was in 1998!
  • No surprise: Portfolios with higher stock allocations again resulted in higher values over 30 years; approximately as high as 6 times vs 3 times for the two scenarios above.  If leaving money behind to heirs is a priority, then a higher allocation of stocks is in your favor.

Weigh-In’s From Michael Kitces and Wade Pfau

Since its inception, many financial researchers have attempted to recreate the studies made by Bengen and the Trinity Study.

In 2010, financial researcher Dr Wade Pfau re-created the Trinity Study and found that a 4.0% withdrawal rate had increased to a 96% success rate (he did this before the revised Trinity Study was published).

Financial researcher Michael Kitces also recreated their experiment, and added some other unique perspective to the discussion.  He investigated a 60/40 stocks and bonds portfolio going all the way back to 1870, and concluded that:

  • Two-thirds of the time, the retiree finishes with two times their original starting balance! The median value was 2.8 times the original balance.
  • Less than 10% of the time does the retiree EVER finish with less than the starting principal.

I find that second point to be especially interesting.  If you are one of the lucky 90% of people who are retired for 30 years and still have more money than what they started with, then you could effectively launch into a “second phase” of retirement with confidence for an additional 30 years using a 4.0% withdrawal rate all over again!

The 4 Percent Retirement Rule

In October of 1994, the Journal of Financial Planning featured an article that would come to be known as one of the most important, often-referenced, and highly debated topics in financial planning.

At its core, the article provided us with something precious.  It gave us a very simple, easy to follow a guideline that virtually anyone can use when thinking about retirement.

It was the birth of what has since become “The 4 Percent Rule”.

Bengen and the Origin of the 4 Percent Rule (1994)

When William P (or Bill) Bengen wrote his now famous article “Determining Withdrawal Rates Using Historical Data”, he didn’t set out to revolutionize the way we planned for retirement.  All he wanted us to do was help us understand that sequence of returns risk was a very real problem when we’re planning for retirement, and offer a better solution.

After demonstrating the dangers of basing a retirement plan on average returns, Bengen presents the reader with a series of data sets designed to do one thing:  Find the greatest amount of money that you could safely withdraw from your nest egg without any fear of depleting your funds.

As a former aeronautical engineer turned financial planner, he used a very data-driven and analytic approach to solving this problem.  It was both brilliant and creative!

How the 4 Percent Rule Was Established

To find the optimal withdrawal rate, Bengen back-tested various withdrawal rates against something called “rolling periods” of market data.

To illustrate how this would work, the first simulation would start with a retiree in 1926. The calculation would find how many years it would take until the entire portfolio ran out of money.  Then he’d do the same thing for 1927, 1928, … and so on all the way up to 1976.

It’s important to note that Bengen didn’t just look at market returns.  He also factored inflation rates for each year into the equation as well.  He knew that the combination of both factors would have a profound net effect on the end result.

Bengen ran the simulation multiple times using withdrawal rates ranging from 1 to 8 percent and using different stocks and bonds ratios.  As you might guess, lower rates lasted for a long time while higher rates lasted only a few years.

Any guesses which rate he decided was optimal?

Bengen’s Conclusion

The take-away from Bengen’s article was straightforward and straight-forward:

A retiree with a portfolio of 50% common stocks and 50% intermediate term treasury bonds could successfully withdraw 4.0% from the starting balance of their portfolio, and then continue to do so with an inflation adjustment for a minimum of 33 years.

Hence, the “4 percent rule” was born.

So how exactly does this work?  Let’s say you retired with a portfolio of $1 million dollars:

  • First year: You could withdraw $40,000.
  • Second year: You would take out the same amount as the year before and adjust for inflation (example 3%): $41,200.
  • Third year: You would again take out the same amount as the previous year and adjust for inflation (example 3%): $42,436.
  • And so on.

Some rolling periods, an inflation-adjusted withdrawal rate of 4.0% worked great for over 50 years!  But since we wanted a “safe” number that used to work for every rolling period (no matter what the sequence of returns was), Bengen choose 4.0 percent as the optimal figure.

(If you’d like, you can read the entire article for yourself here.   I would suggest looking through the graphs!)

But That’s Not All!

Although the 4 percent rule was the main conclusion from Bengen’s famous article, there were plenty of other useful discoveries that his research revealed.

For example, it may interest you to know that:

  • Withdrawal rates of 3.0 and 3.5% with the same inflation adjustment sequence worked for over 50 years in every data set!  (Early retirement seekers, take note!)
  • Asset allocation was a significant influence.  Increasing your portfolio to 75% stocks and 25% bonds increased most periods to last 50 years or more.  But the minimum time dropped by one year to 32 years of success.
  • Portfolios with stocks below 50% or above 75% were counter-productive; meaning these retirees would have run out of money sooner than 30 years.
  • If you had a secondary goal of ending your retirement with the largest portfolio possible (to perhaps leaving to heirs), the higher stock allocation of 75% was the most beneficial.

At last!  Someone had finally offered a way to deal with a sequence of returns risk, and with tangible data to back it up.

But it wasn’t until years later the 4 percent rule actually gained in popularity.

The Trinity Study (1998)

In February of 1998, the AAII (American Association of Individual Investors) Journal published another important milestone for the 4 percent rule.

Three professors of finance from the Department of Business Administration, Trinity University, San Antonio, Texas, Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz, had decided to conduct their own study of safe withdrawal rates.

Their approach would be almost identical to Bengen’s; using the same “rolling-periods” method that he had previously used.   However, rather than focus on how many years your money would last 100% of the time for a given withdrawal rate, the authors instead developed statistical probability rates for a matrix of fixed withdrawal rates (3 to 12%) and time-frame periods (15 to 30 years).

Their paper was dubbed “The Trinity Study”, and you can read it for yourself at this link here.  Again, the table of results they developed is well worth taking a look at.

The Trinity Study Makes Similar Conclusions to Bengen

The take-away from the Trinity Study was very similar to Bengen’s:

A retiree with a portfolio of 50% stocks and 50% bonds will have a 95% chance of success of not running out of money for at least 30 years if they start making withdrawals at a rate of 4.0% and increase those withdraws with inflation every year thereafter.

More Gold Nuggets of Info

In addition to validating Bengen’s earlier claim, the Trinity Study also made the following other valuable points:

  • The analysis was conducted with both inflation adjusted and non-inflation adjusted returns.  Even though we know that a safe withdrawal rate of 4.0% works with inflation adjustment, it was also found that a rate as high as 6.0% could be used if you DIDN’T adjust for inflation every year with a 95% chance of success for 30 years or more.  (More on this point later …)
  • If you bumped up your stock allocation to 75%, your chances for 30 years of success jumped up from 95% to 98%.
  • Similar to Bengen, portfolios with stock allocations below 50% or above 75% were counter-productive.
  • Also similar to Bengen, the authors concluded that a portfolio of stocks closer to 75% would leave you with more money at the end of retirement.

(A quick technical note:  If you’re wondering why Bengen’s 4% rate worked for 33 years and the Trinity Study’s 4.0% rate only worked 95% of the time for 30 years, the difference was in the investments they used.  Both Bengen and the Trinity Study used the Standard & Poor’s 500 index for stocks.  But when it came to bonds, Bengen used intermediate treasury bonds while the Trinity Study used long-term, high-grade corporate bonds.)

Do You Know About Tax Form 1040 Schedule E

Do you own a property which gives you rental income or losses on a regular basis? Are you eager on earning through royalties or pass through entities? Do you plan to buy a multiple unit property so you can live in one while renting out the others? For successfully getting any of the above done, you must know about IRS form 1040 Schedule E. It is a very important form and something you need to be aware of. So, what is this for, 1040 Schedule E exactly?

The IRS form 1040 Schedule E is used to report income and losses from rental property. It is also used to report income from pass through activities such as trusts and estates. If you are earning via pass through activities and are not receiving any rental income, you should fill out the form 1040 Schedule E. Those who have a pass through entity receive a Schedule K-1 from the entity and using the instructions on it to fill out Schedule E is quite easy.

However, if you have to report rental income for your property, things can get a little complicated. You will have to know and write about your accounts over the year to get a clear picture. It is recommended that you use a tax accounting software for the task and keep track of your income. Here is a list of everything that you need to keep track of.

  • The price at which you bought your property before renting it out. Your property could be a condo, a house, or even an apartment building.
  • Both annual and accumulated depreciation of your property.
  • The rental income you are earning from your property.
  • The security deposits you have received.

Deductible expenses

It is also important to keep track of all your deductible expenses as they have their own separate place on Schedule E. A deductible expense is an expense which you made to facilitate your income. These are made to make your property better and more suited for renting and increase its value. These expenses also produce more interest, revenue, dividends, royalties, and annuities for you. If you do not record them on your form, you will not be reporting exact expenses and will have to pay taxes on an income you never really made. Every dollar which you report on Schedule E reduces approximately 35 cents off your tax bill. This is a big reduction which is why you should diligently report all your deductible expenses. These expenses include:

  • Money spent on advertising
  • Money spent on maintenance of the property such as getting it cleaned, repaired etc.
  • Property management fees
  • The commission you paid real estate professionals for their services. These also include listing agencies.
  • Real estate taxes
  • Reimbursed security deposits
  • Money spent on utilities such as electricity and water, waste collection fees, landscaping of the plot, and more.

It is important to remember that it is not possible to deduct more in investment interest than you earn in investment income. At the same time, it is possible to carry your disallowed investment forward to the next year.

Passive activity

Earning money through rental property is considered a passive activity, that is, the owner is not making any real effort to earn that money. In other words, you hold ownership interest but are not actually participating in any type of work for facilitating earning. It does not matter if you, as a property owner, are spending a lot of time on your property and making it better, the government is still going to file this income under passive activity.

Those who earn through passive activity suffer from a total loss of around twenty five thousand dollars from all their rental properties. This is the minimum amount which you will definitely lose. Any extra amount that you lose will be carried to the next year which can, thankfully, help you reduce your tax liability in that year.

Therefore, if you borrow money to purchase a property so you can rent it out, you will not be able to file it as investment interest. However, this expenditure can be used as an expense item on your Schedule E form.

Partnerships in S corporations

If you are earning through an S corporation entity, you will have to report your share of business income in Schedule E form. This is pretty self explanatory if you receive Schedule K-1 which asks you to report your share of income, losses, as well as deductions. In short, everything needs to be filled according to the details you fill out in the Schedule K-1 form related to the property.

Contacting a tax professional

It is possible that even after diligently filling out Schedule E form 1040, you face a lot of trouble. Situations can get complicated which is why it becomes necessary to bring in a professional into the scene. There are certain things which are best left to a professional who knows about taxes. Hence, when you find yourself in one of those, make sure you consult one. Professional help will enable you to stay with the law as well as minimize your tax liability.

Tax professionals are also very savvy at understanding your complete financial situation and also knowing whether or not is a good idea to sell your structured settlement or to hold onto it in your long term financial plans.


It is necessary to keep a track of all your expenses throughout the year so you can save money on taxes and find it easy to report it all at the end of the year. If you earn with your property as an entity, the best thing to do is fill out your Schedule E form in accordance with the information you fill out in Schedule K-1. Any confusion in your tax form should be handled with the help of a professional. These professionals will help you comply with the law and also minimize your tax liability.