Corp AAA bond vs. secondary market annuity

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dandan14
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Corp AAA bond vs. secondary market annuity

Post by dandan14 »

Can you folks help me understand something?
A 30 year AAA corporate bond from Berkshire Hathaway is paying about 2.75-3%.
However, I could theoretically buy an annuity on the secondary market also from BH that essentially acts like a 24 year bond paying 3.79%.
https://www.immediateannuities.com/seco ... annuities/

Why would it pay so much more? Wouldn't it be even safer than the corp bond -- because of the state guaranty system?
Gill
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Re: Corp AAA bond vs. secondary market annuity

Post by Gill »

The annuity cash flow is not just income but is also a partial return of principal.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
usagi
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Re: Corp AAA bond vs. secondary market annuity

Post by usagi »

Uh...secondary annuities are usually not annuities in the normal sense of the word. In general you should not consider them an annuity in the sense of an insurance annuity.

Many of these are derived from the compensation resulting from a lawsuit, which sounds good (perhaps?) up until the judgement is vacated or reversed on a later appeal, which means you, the purchaser of said secondary annuity end up with nothing.

And even on a straight secondary annuity (as in an insurance annuity) you lose the state guarantee.

For a while, circa 2000 viaticals were being pushed as a form of secondary annuities, an the niche was selling viaticals based on life insurance of people who were HIV positive and had full blown AIDs. It seemed like a win - win (my favorite type of transaction)and I bought a few only to wise up and bail as I saw the drug testing for the new cocktails they proved out - whew. Long story short, a whole lot of people who thought they were in a win -win transaction on a viatical are in for a long, long wait as. for the most part, HIV is no longer a short or intermediate term death sentence but increasingly viewed as a manageable disease and possibly curable. The difference those who bit on the viaticals eventually do get a payout, but you may lose you entire investment in a secondary annuity based on a settlement.

My point it, these can be very attractive but understand exactly what you are buying and the risk ensued.
Last edited by usagi on Sun Oct 06, 2019 8:30 pm, edited 2 times in total.
venkman
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Re: Corp AAA bond vs. secondary market annuity

Post by venkman »

The bond returns your principal at the end of the term. The annuity just ends.

It looks like the specific SMA you're looking at costs ~$95k and pays out $142.5k over 23.75 years. A $95k bond yielding 2.75% would pay out ~$62k over 23.75 years, at the end of which you'd get your $95k back, for a total of $157k (and that assumes no reinvestment of interest).
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dandan14
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Re: Corp AAA bond vs. secondary market annuity

Post by dandan14 »

Gill wrote: Sun Oct 06, 2019 7:56 pm The annuity cash flow is not just income but is also a partial return of principal.
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I double checked it with a spreadsheet. That is the YTM rate.
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dandan14
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Re: Corp AAA bond vs. secondary market annuity

Post by dandan14 »

venkman wrote: Sun Oct 06, 2019 8:19 pm The bond returns your principal at the end of the term. The annuity just ends.

It looks like the specific SMA you're looking at costs ~$95k and pays out $142.5k over 23.75 years. A $95k bond yielding 2.75% would pay out ~$62k over 23.75 years, at the end of which you'd get your $95k back, for a total of $157k (and that assumes no reinvestment of interest).
Not the case in this instance. I checked with XIRR.
This feels very much like a bond with a set payment schedule -- not a lifetime annuity.
bsteiner
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Re: Corp AAA bond vs. secondary market annuity

Post by bsteiner »

The bond is more liquid.
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dandan14
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Re: Corp AAA bond vs. secondary market annuity

Post by dandan14 »

bsteiner wrote: Sun Oct 06, 2019 9:33 pm The bond is more liquid.
That's a great point. Getting out of a 30 year payment arrangement (because that's what it is, more than an life annuity) would be costly. You'd have to try to sell it again on the secondary market -- which is likely costly and time consuming.
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