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SMIA Case Study

47-Year Old Male

At the commencement of my business relationship with this client, he clearly indicated he was extremely risk-averse. After losing in S&L crisis in his early years of saving for retirement and after experiencing two major market corrections, he was a bit leery of the financial services industry.

Despite this conservative mindset, this client successfully accumulated assets of more than $600,000 in cash and IRA holdings. In addition, he owns several investment properties, two homes and carries no debt. He has done an exceptional job of saving and living within his means. By all accounts, he is an ideal client.

We initially started to discuss annuities and analyzed various contracts under consideration. While he was not interested in investing in products that had associated risk, he was also not excited about the lower yield offered by other products. As a result of these investment objectives, the client did not engage in any investment activity – keeping his savings as cash – for lack of an overall strategy.

Secondary Market Income Annuity products presented this client with a wonderful opportunity — the potential for substantially higher interest rates on a guaranteed basis. The strong advisor-client relationship we built gave him the confidence to act quickly. This ability to make relatively quick investment decisions is extremely important to the SMIA purchase process and is a critical foundation for every individual that may consider these products.

We accomplished the following for this particular client:

He purchased four separate SMIAs for a total investment of $297,910. Rates on these products range from 6.25% to 7.25%, over a time period of 10 to 25 years. For the sake of simplicity, aggregate figures and total distribution are found below.

The client’s age at the time of each distribution:

    1. $60,000 at age 58
    2. $60,000 at age 60
    3. $30,000 at age 62
    4. $100,000 at age 63
    5. $265,000 at age 64
    6. $83,250 at age 67
    7. $100,000 at age 68
    8. $300,000 at age 73

Total aggregate cash flow from the four purchased SMIAs amounts to $998,250, for a present value investment of $297,910. This investment strategy provides a staggered set of payments, allowing the client to ladder various retirement income investments, countering longevity risk and inflation risk. The client used only half of his current investible assets, with no exposure to market volatility. With continued savings over the next ten years and conservative financial management, this client has an excellent opportunity for early retirement.