August 20, 2018

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Solving for 20 Years of Income with Structured Cash Flows (SCF)

 

SCF Case Study:  Generate $5,000 a month for 20 years (240 months) using the 5, 4, and 3 year terms SCF contracts. 

 

Background – recently clients wanted to convert cash that they had accumulated into a stream of guaranteed income payments over a 20 year period. They were both in their early 60’s.

 

Step 1: Purchase a 5 year SCF for $255,243 at 7% to solve for the first 5 years of income.   Simple calculator attached.  

 

Step 2:  Purchase 3 x 5 year SCF to be used in the Fixed Savings Strategy to solve for the same purchase price above 5 years, 10 years and 15 years in the future.   Calculator attached.  

 

Considering current fixed rates the 5 year Fixed Savings Strategy will produce an equivalent savings return of 4.2579%.

 

  • Funds needed today to solve for $255,243 in 5  years = $207,209

  • Funds needed today to solve for $255,243 in 10 years = $168,215

  • Funds needed today to solve for $255,243 in 15 years = $136,559

 

Assuming no changes in interest rates and ignoring taxes due on interest, the total funds needed to generate $5,000 per month for 20 months  = $767,211.

 

Total income generated over 240 months = $1,200,000

 

Advantages to Strategy: 

  • By using shorter duration cash flow payments (5, 4 and 3 years) which continually return principal and interest, one can reduce risk related to long inflexible terms, provide higher liquidity to their clients which provides for tremendous flexibility to adjust as interest rates change.