38 yr old with a question about structured settlement

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
mikejuss
Posts: 1717
Joined: Tue Jun 23, 2020 1:36 pm

Re: 38 yr old with a question about structured settlement

Post by mikejuss »

cockersx3 wrote: Mon Oct 18, 2021 8:38 am
mikejuss wrote: Mon Oct 18, 2021 12:18 am
cockersx3 wrote: Sun Oct 17, 2021 6:16 pmwhich doesn't align with my understanding of how structured settlement annuities work.
Curious: what is your "understanding of how structured settlement annuities work"? In this case, it appears to be a monthly sum subject to market fluctuations. Is there another kind of settlement with ironclad interest rates paid out along with the principle?
I had thought (and I could very well be wrong) that the payments from a structured settlement annuity needed to be fixed - ie, $xx dollars paid over $xx period - to preserve the tax-free status of the annuity. The whole idea is that the legal settlement is written such that the tortfeasor pays the recipient that fixed amount, rather than a lump sum. In this way the settlement annuity preserves its tax-free status - instead of getting $xx as a lump sump, you instead get $yy over zz years.

This is how my settlement annuity worked, and from my (albeit limited) research on them this is how they generally are written. I agreed to receive a portion of my legal settlement as annual payments of a fixed amount over a fixed number of years. The amounts and dates were written into the legal settlement / discharge of claims that I signed along with the tortfeasor. The annuity was then "assigned" by the tortfeasor to a well-known, highly rated insurance company who actually makes the payments.
Interesting. What kind of premium--above and beyond the settlement amount--are you receiving? Is it anywhere near 6.2%?
User avatar
cockersx3
Posts: 470
Joined: Sun Apr 17, 2016 3:55 pm

Re: 38 yr old with a question about structured settlement

Post by cockersx3 »

mikejuss wrote: Mon Oct 18, 2021 9:02 am
cockersx3 wrote: Mon Oct 18, 2021 8:38 am
mikejuss wrote: Mon Oct 18, 2021 12:18 am
cockersx3 wrote: Sun Oct 17, 2021 6:16 pmwhich doesn't align with my understanding of how structured settlement annuities work.
Curious: what is your "understanding of how structured settlement annuities work"? In this case, it appears to be a monthly sum subject to market fluctuations. Is there another kind of settlement with ironclad interest rates paid out along with the principle?
I had thought (and I could very well be wrong) that the payments from a structured settlement annuity needed to be fixed - ie, $xx dollars paid over $xx period - to preserve the tax-free status of the annuity. The whole idea is that the legal settlement is written such that the tortfeasor pays the recipient that fixed amount, rather than a lump sum. In this way the settlement annuity preserves its tax-free status - instead of getting $xx as a lump sump, you instead get $yy over zz years.

This is how my settlement annuity worked, and from my (albeit limited) research on them this is how they generally are written. I agreed to receive a portion of my legal settlement as annual payments of a fixed amount over a fixed number of years. The amounts and dates were written into the legal settlement / discharge of claims that I signed along with the tortfeasor. The annuity was then "assigned" by the tortfeasor to a well-known, highly rated insurance company who actually makes the payments.
Interesting. What kind of premium--above and beyond the settlement amount--are you receiving? Is it anywhere near 6.2%?
Not anywhere close to 6.2%. More like bond levels (ie what they were back when I got my settlement.) Since it is (I thought) typically a guaranteed payment stream, one would expect bond level returns...which is why something seems a bit off to me.

That said, it sounds like the OP is looking at settlement annuity time frames that are measured in decades, so maybe they are giving the OP a higher return to compensate for the liquidity? But even then - looks like 30-year Treasury bills are yielding like 2% nominal right now, so probably not it.
User avatar
sergeant
Posts: 1796
Joined: Tue Dec 04, 2007 11:13 pm
Location: The Golden State

Re: 38 yr old with a question about structured settlement

Post by sergeant »

I will join the chorus recommending to take the lump sum. Pay off debt. Contact Vanguard PAS. Do what they recommend. You will be way better off than any other plan.
For the ashes of his fathers, And the temples of his gods. | Pensions= 2X yearly expenses. Portfolio= 40X yearly expenses.
Topic Author
h08151952
Posts: 15
Joined: Mon Oct 11, 2021 9:22 pm

Re: 38 yr old with a question about structured settlement

Post by h08151952 »

mikejuss wrote: Mon Oct 18, 2021 12:18 am
cockersx3 wrote: Sun Oct 17, 2021 6:16 pmwhich doesn't align with my understanding of how structured settlement annuities work.
Curious: what is your "understanding of how structured settlement annuities work"? In this case, it appears to be a monthly sum subject to market fluctuations. Is there another kind of settlement with ironclad interest rates paid out along with the principle?
Yes, it is a monthly sum subject to market fluctuations. The projected estimate of return is 6%.

I will not get taxed on the settlement now and not get taxed on any of the proceeds.

I contacted Vanguard PAS and talked with an advisor. I will get half the settlement this year then half next year.

I still have not made a decision about what to do, but your feedback is very immensely helpful and even more after a stepped away from this forum a few weeks and returned to it.

"I had thought (and I could very well be wrong) that the payments from a structured settlement annuity needed to be fixed - ie, $xx dollars paid over $xx period - to preserve the tax-free status of the annuity. The whole idea is that the legal settlement is written such that the tortfeasor pays the recipient that fixed amount, rather than a lump sum. In this way the settlement annuity preserves its tax-free status - instead of getting $xx as a lump sump, you instead get $yy over zz years.

This is how my settlement annuity worked, and from my (albeit limited) research on them this is how they generally are written. I agreed to receive a portion of my legal settlement as annual payments of a fixed amount over a fixed number of years. The amounts and dates were written into the legal settlement / discharge of claims that I signed along with the tortfeasor. The annuity was then "assigned" by the tortfeasor to a well-known, highly rated insurance company who actually makes the payments."

The above is correct.
mikejuss
Posts: 1717
Joined: Tue Jun 23, 2020 1:36 pm

Re: 38 yr old with a question about structured settlement

Post by mikejuss »

h08151952 wrote: Tue Nov 02, 2021 10:46 am Yes, it is a monthly sum subject to market fluctuations. The projected estimate of return is 6%.
...

"I had thought (and I could very well be wrong) that the payments from a structured settlement annuity needed to be fixed - ie, $xx dollars paid over $xx period - to preserve the tax-free status of the annuity."

The above is correct.
What I'm not understanding about the description above is that you say the payments, if you receive them over time (rather than as a lump sum), will vary according to market fluctuations but that in order for the payments to have a tax-free status they must be fixed. Perhaps I'm missing something.

In any event, what is your main concern about taking the settlement as a lump sum? Is the issue behavioral (ie, you're afraid you'll do something dumb with a windfall)? Try not to overthink this...
Dottie57
Posts: 10630
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: 38 yr old with a question about structured settlement

Post by Dottie57 »

Take the lump sum. The stated fee is too high.

With the lump sum you can pay off debt and increase cash flow. Invest the remaining money and increase yearly investing.

Do not let the investment company take 1.25% a year.
T4REngineer
Posts: 168
Joined: Thu May 31, 2018 9:50 am

Re: 38 yr old with a question about structured settlement

Post by T4REngineer »

No knowledge of how settlements work but it appears you have two major options with some "smaller" variations if I understand this correctly

*Lump sum now: 1million, tax free to do with as you please, lets assume you invest and get a 7.75% return on this money over 2 decades and then start to sell at unknown long term capital gains - $4,449,852 starting value

*Defer with settlement company and they do the investment for you, but charges you 1.25% so your return is now 6.5% but that money is going to come to you tax free over X years. - $3,523,645 starting value

I would be solving the problem to understand what my break even numbers look like taking into LARGE account I much prefer the idea to have full control over my investments and when to use them vs locking it up for 20 years. Just back of the napkin math above I would take the lump sum now and invest - the ending results is much larger because you are not paying the investment fees and I think (but would verify!) that delta is going to account for any potential long term capital gains taxes in the future and the delta gets bigger if you are assuming you are only taking out small % of the value each year and leaving the rest to grow - growth happens much faster on a number that's >25% bigger (Lump sum, savings the investment fee)

In summary, 1 more vote for lump sum
User avatar
8foot7
Posts: 2944
Joined: Mon Jan 05, 2015 7:29 pm

Re: 38 yr old with a question about structured settlement

Post by 8foot7 »

I'd be very concerned about credit risk here. (This was probably addressed upthread but I did not read all of the responses.)
User avatar
Matahari
Posts: 617
Joined: Sun Mar 08, 2015 3:09 pm

Re: 38 yr old with a question about structured settlement

Post by Matahari »

8foot7 wrote: Tue Nov 02, 2021 12:06 pm I'd be very concerned about credit risk here. (This was probably addressed upthread but I did not read all of the responses.)
+1. I don't recall if OP has disclosed the number of years over which the structured payments would last. With any agreement in which OP is receives any part of the settlement over a period of time, OP is subject to the credit-worthiness of the tortfeasor over such payment period.
fyre4ce
Posts: 1792
Joined: Sun Aug 06, 2017 11:29 am

Re: 38 yr old with a question about structured settlement

Post by fyre4ce »

Is it really true that money invested inside a structured settlement is completely tax-free? Assuming that's the case...

If money is taken as a lump sum and invested in a taxable account:
OP is in a high tax bracket. Assume 35% ordinary income, 38.8% STCG/NQD, and 18.8% LTCG/QD.
Assume future 15% rate on LTCG.
Also assume 8% return, 2% yield, 90% qualified.
Assume 25 year investing horizon.
Average dividend tax rate: 20.8% (= 90% x 18.8% + 10% x 38.8%)
Future value: $6,218,594 (= $1M x (1 + 8% - [2% x 20.8%])^25)
Future basis: $2,089,959 (formula here)
Future value after taxes: $5,599,299 (= $6,218,594 - ($6,218,594 - $2,089,959) x 15%)

If money is left in structured settlement and grows tax-free:
Future value: $5,119,141 (= $1M x (1 + 8% - 1.25%)^25)

You can expect about 9% more value out of taking the lump sum, plus you also have more flexibility and don't have to deal with a sleazy overcharging financial services company.
mikejuss
Posts: 1717
Joined: Tue Jun 23, 2020 1:36 pm

Re: 38 yr old with a question about structured settlement

Post by mikejuss »

fyre4ce wrote: Tue Nov 02, 2021 2:41 pm Is it really true that money invested inside a structured settlement is completely tax-free? Assuming that's the case...

If money is taken as a lump sum and invested in a taxable account:
OP is in a high tax bracket. Assume 35% ordinary income, 38.8% STCG/NQD, and 18.8% LTCG/QD.
Assume future 15% rate on LTCG.
Also assume 8% return, 2% yield, 90% qualified.
Assume 25 year investing horizon.
Average dividend tax rate: 20.8% (= 90% x 18.8% + 10% x 38.8%)
Future value: $6,218,594 (= $1M x (1 + 8% - [2% x 20.8%])^25)
Future basis: $2,089,959 (formula here)
Future value after taxes: $5,599,299 (= $6,218,594 - ($6,218,594 - $2,089,959) x 15%)

If money is left in structured settlement and grows tax-free:
Future value: $5,119,141 (= $1M x (1 + 8% - 1.25%)^25)

You can expect about 9% more value out of taking the lump sum, plus you also have more flexibility and don't have to deal with a sleazy overcharging financial services company.
Wow. Nice math, fyre4ce.

Two footnotes: it's not at all clear to me that the investment growth in the amortized version of the structured settlement will be tax-free. The long-term capital gains rate will likely rise over the next two decades. All signs point to lump sum.
Topic Author
h08151952
Posts: 15
Joined: Mon Oct 11, 2021 9:22 pm

Re: 38 yr old with a question about structured settlement

Post by h08151952 »

Thank you everyone for your responses to my question.

I decided to do the lump sum.

This forum was so helpful.

Now I have had my lump sum sitting in my account for two months. I am trying to decide how to invest the money into index funds. I am with Fidelity and have spent the last months talking with financial advisors who have very high fees 1.5% plus monthly charges.

I would rather lean into the Bogleheads community and self guided learning to invest this money.

If you have any suggestions for good index funds and a tax efficient strategy, I am open to ideas.

Again, thank you very much. This was a very big decision and I almost went with the structured settlement.
mikejuss
Posts: 1717
Joined: Tue Jun 23, 2020 1:36 pm

Re: 38 yr old with a question about structured settlement

Post by mikejuss »

h08151952 wrote: Thu Jan 13, 2022 1:38 pm Thank you everyone for your responses to my question.

I decided to do the lump sum.

This forum was so helpful.

Now I have had my lump sum sitting in my account for two months. I am trying to decide how to invest the money into index funds. I am with Fidelity and have spent the last months talking with financial advisors who have very high fees 1.5% plus monthly charges.

I would rather lean into the Bogleheads community and self guided learning to invest this money.

If you have any suggestions for good index funds and a tax efficient strategy, I am open to ideas.

Again, thank you very much. This was a very big decision and I almost went with the structured settlement.
Good call, OP.

You don't need an adviser to invest the lump sum. Just invest in 3 funds--domestic stocks, foreign stocks, and bonds--at whatever percentage you like (e.g., FXAIX @ 40%, FSGGX @ 20%, and FXNAX @ 40%). There's a full list of Fidelity's index offerings here.
WaarrEagle
Posts: 3
Joined: Wed Aug 21, 2019 9:30 am

Re: 38 yr old with a question about structured settlement

Post by WaarrEagle »

sport wrote: Mon Oct 11, 2021 9:58 pm Welcome to the forum.
Vanguard Private Advisory Service (PAS) is a good low cost advisor. They will not cheat you nor take advantage of you.
Echoing the 3rd post from the original thread. Someone like Vanguard PAS will serve you well and cost 0.3%. I personally pay them to manage my portfolio even though I am very capable of doing it myself. Given your unfamiliarity in this space, it might be a good fit and they will take good care of you with a Boglehead philosophy. I also use PAS to give my spouse a fallback in case something were to happen to me.
Topic Author
h08151952
Posts: 15
Joined: Mon Oct 11, 2021 9:22 pm

Re: 38 yr old with a question about structured settlement

Post by h08151952 »

I did speak with a PAS at Vanguard, but moving my funds from Fidelity would be a little complicated.

I want to try and stay at Fidelity and spoke to the advisor, but they seemed to recommend managing my own and investing in diversified portfolio of index funds.
User avatar
cockersx3
Posts: 470
Joined: Sun Apr 17, 2016 3:55 pm

Re: 38 yr old with a question about structured settlement

Post by cockersx3 »

h08151952 wrote: Thu Jan 13, 2022 1:38 pm Thank you everyone for your responses to my question.

I decided to do the lump sum.

This forum was so helpful.

Now I have had my lump sum sitting in my account for two months. I am trying to decide how to invest the money into index funds. I am with Fidelity and have spent the last months talking with financial advisors who have very high fees 1.5% plus monthly charges.

I would rather lean into the Bogleheads community and self guided learning to invest this money.

If you have any suggestions for good index funds and a tax efficient strategy, I am open to ideas.

Again, thank you very much. This was a very big decision and I almost went with the structured settlement.
Good call! Believe me, you made the right decision by a) going for the lump sum, and b) allowing yourself to "cool down" before making any big decisions with the money. You won't regret it.

It's hard to answer your questions without knowing some other key points - ie your age, your risk tolerance (how much of a portfolio drop could you handle before panicking and selling everything?), what other accounts you have, which ones are taxable vs tax deferred / tax free, what they are all invested in, and - most importantly - what your goals are for the money (ie retirement, new house, giant party, etc). Your best bet would be to read over the "Asking portfolio questions" wiki to see some guidance on what we'd need to advise you.

I would also suggest perhaps starting a new thread to help you decide what to do with the money, since the topic has changed (ie no longer asking about lump sum or not, now looking for investment advice). Probably a better question for the forum moderators, but I do think you'd get more responses that way by initiating a new thread with these new questions.

My initial thinking is that you can easily do whatever you need using Fidelity, but would want to see what else you have before making that advice. Keep in mind that asking for comparisons between Fidelity and Vanguard in this forum can sometimes feel like comparing Coke vs Pepsi, or the Yankees vs the Red Sox. People tend to have very strong feelings about them. (And the right choices there are Coke and the Red Sox, by the way - all other answers are just wrong :D ).

I can tell you that I used to have the balance of my settlement at Vanguard, but I eventually moved everything over to Fidelity for ease of management. All of my work retirement funds - and those of my wife - were there already, so it was just easier for me to keep everything in one spot. Fidelity's customer service seemed to be better, which also was a consideration in terms of estate planning - if something happens to me, I want my wife to be able to access the money easily and not fight through a customer service phone tree. Note that I manage my own investments now, so I don't use any of Fiidelity's higher fee services.

Once again, congrats on making the right decision OP!
Post Reply