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"Are Today's Interest Rates Crap?"

This was the question posed to me by a straight-talking attorney last week. I replied: “Well, if you go by current U.S. Treasury bond rates, a lot of people would sure think so!” We all want rates to be “high” when we have money to invest but this was not necessarily how I wanted to begin my discussion with an attorney representing a severely injured claimant.

Actually, structured settlement rates are not only far higher than U.S. Treasury rates but their returns have been improving lately, something that surprises many. It may have been an awkward opening question, but it did lead to an important discussion about comparative interest rates, financial planning in general, and an even more important outcome for her client.

I inquired whether interest rates alone would be the deciding factor in her client’s decision and I asked this because structured settlement rates do not exist in a vacuum. Whether or not her client structures anything, she will still need to invest the proceeds somewhere. If she is the type for whom yield alone is the sole deciding factor, then she is going to have to take on a lot of risk with her cash to beat the kind of income that a structured settlement offers on a guaranteed basis. Indeed, investors burned by “chasing yield” become the butt of many a stockbroker’s joke.

But there’s a new trend in financial planning that few stockbrokers are laughing at and it confirms the old adage that “everything old is new again”. It’s called “expense-based” planning and it reverses the predominant “asset-based” model, approaching the problem from a different angle. Instead of pondering what kind of return you hope to achieve and then running computer model simulations to display the “probability” of that money lasting as long as you need it to, this one starts by identifying and meeting your fixed future expenses first and then working outward from there.

The idea is to secure your financial future by anchoring it to a plan that you know will meet your most vital future expenses no matter what. If you can do better than that, great, but a predictable and secure financial future is the goal. One you can’t outlive.

Wait a minute…did someone say something about income you can’t outlive? You mean just like those glorious pension plans of yore? Yes indeed, the concept of re-creating an old-fashioned pension for yourself is so much back in vogue that the Wall Street Journal dedicated a special weekend feature to the subject recently .1 The idea of establishing a steady source of income guaranteed for life holds a very strong appeal in our culture, even if the corporations who sponsored them have increasingly walked off the job.

For most people, the days of working for a company for 20 or 30 years in exchange for knowing that you and your spouse were truly financially secure are over. Most people are now on their own with a poor-substitute 401(k) plan or its ilk. We are now alone with the decision to save, alone with the decision of what to invest in, alone with the investment and longevity risk, and forced to begin making withdrawals at an arbitrary age. What most of us today wouldn’t give for the simple, secure, and dependable lifetime monthly income of a classic pension.

Well, as the Wall Street Journal describes, those days don’t have to be over entirely and this is especially true for people settling a personal injury claim. In fact, designing a structured settlement like a traditional pension is a mighty effective way to approach the process. Besides, while most personal injury victims are orders of magnitude less able to tolerate risk than ordinary retirees, their financial objectives are similar: security and the ability to meet expenses forever is paramount. The parallels are uncanny.

And just what did those wonderful corporations use to secure lifetime pension payments to their retirees? Lifetime annuities backed by highly rated life insurance companies. In fact, they used many of the very same companies who underwrite structured settlements today (Metlife, New York Life, Prudential, etc.). It was not the retirees alone who wanted to know for sure that their payments would be made, the corporations themselves didn’t want to be burdened with having to assure payment. Instead, they insured it.

Settling claimants have the same choice but with one major advantage: the ability to sidestep taxes on investment earnings forever. The structure may not fulfill all of their investing needs, but for the bedrock source of lifetime income they want to be able to count on, structures are incomparable. No other source of guaranteed income will pay higher net returns or insure that they will never outlive the invested principal.

This brings us back to our injured claimant and her attorney’s question about interest rates. Viewed in isolation, it’s hard not to think that something better has to be out there. But a sharp-eyed examination of the alternatives quickly shows that the benefits of a Section 104-qualified structured settlement endure and continue to deliver higher value than any comparable post-settlement alternative. The prospect of a vulnerable claimant cashing out an entire settlement simply “hoping to do better” is too hair-raising for responsible practitioners to bear.

And that makes me particularly happy to report that this attorney was also smart enough to realize this. We crafted a good design in an appropriate amount and the structure will reliably serve her client’s most important needs for years to come.
Concerned about releasing a vulnerable person with a single large check into this uncertain economy? Give them at least a fighting chance by securing a portion of it the way your parents might have. Decades from now, that person will still thank you.

If you would like help explaining how this all works, call Frank C. Kilcoyne CSSC at
800 544 5533. I am here to help.

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1“New Ways to Create a Gold-Plated Pension, The Wall Street Journal, October 30, 2010