Making Your Money Last

A 2-Pronged Strategy for Retirees Seeking Safe Cash Flow: Non-Traded REITs and Annuities

Non-traded REITs and annuities can provide a lifetime income stream with a principal that could possibly grow over time, leaving a richer legacy for your heirs.

In today’s investment world, finding decent cash flow is about as easy as finding a parking space at the shopping mall on Black Friday. The typical places to park for higher cash flow include junk bonds, bank and utility stocks, publicly traded REITs and fixed indexed annuities (FIAs) to name a few. All but the FIAs involve very high short-term risk to principal, since they all trade on the open markets and are subject to short-term investor sentiment and the “fear and greed” cycles associated with the markets. So let’s focus on my strategy for FIAs and non-traded REITs for the moment:

Annuities, in a nutshell

First, how do FIAs provide lifetime cash flow? They are designed, once you start cash flow, to pay you a monthly check for life no matter how long you live. For example, there is a popular annuity a 60-year-old male can purchase for $100,000, wait one year to start collecting payments for life, and then is promised $4,800 per year. There are many attractive features in an FIA. First, you can collect payments even if your account balance is zero, so if you live a long time, your internal rate of return increases. Most are designed with no downside in a bad stock market (watch for rider fees though). And finally, unlike a pension, if you pass away prematurely, your heirs receive the remaining accumulation value (if any).

So what’s wrong with this annuity? Most of the 4.8% cash flow is return of principal, not earnings. It is therefore a self-liquidating asset. If you have a desire to leave money to others someday, this may not be a great fit.

A better option than annuities alone

By taking some non-stock market risk, there may be an alternative. Through a combination of a public, non-traded REIT, or a Delaware Statutory Trust (DST), along with an FIA designed for maximum growth, it may be possible to pull at least 6% per year in cash flow while increasing the underlying value of your original investment. Let’s examine this.

First, if my 60-year-old client placed some of his investment into a public, non-traded real estate investment trust or DST, well vetted, the yield could produce a monthly cash flow in the neighborhood of 4%. Depending on how you feel about real estate, you may be attracted to an asset consisting of a group of centrally managed multi-family apartments, medical office buildings and/or self-storage units across the country, located in growing markets. Make sure your investment has been vetted for leverage, exit strategy, firm history, etc. Now, assuming you get this yield, it could also be assumed that inflation will cause rent and appreciation opportunities. In my analysis, I used 2.5% per year.

The rest of the investment could be placed in an FIA that offers a participation rate on the gains in the S&P 500 annually, without any of the losses. Volatile markets work wonders for this type of product, such as the kind of markets we’ve seen since leg warmers and parachute pants were in style.By taking the free withdrawal allowance in this product, you could liquidate this over the years to provide an overall 6% projected cash flow on the original investment. My computations showed me that this annuity would run out after 14 years, but during that 14-year period, my original investment in the REIT could have appreciated more than enough to now be worth over the original total investment.

The bottom line

There are many inherent risks using the combination of a REIT and FIA to produce growth, cash flow and security. These are both relatively illiquid investments, real estate can suffer due to unforeseen market trends, over-leverage, and poor exit strategies. In addition, fees for non-traded REITs can be high — as much as 15% per share price when you include sales fees and other organizational costs. Annuities must be vetted for insurance company and interest crediting risks. FIAs paying lifetime cash flow do not share these same risks. So investors really do have to understand what they’re buying into.

But for those of us who like real estate and the safety of FIAs, this strategy could produce more cash flow and legacy assets than the typical fixed indexed annuity designed for lifetime cash flow.

Madrona Financial Services' registration with the SEC does not imply a certain level of skill or training. Advisory services are only provided after receipt of disclosure documents and execution of an advisory agreement. The information, suggestions and recommendations included in this material are for informational purposes only and do not constitute financial, legal or accounting advice. Hypothetical returns shown illustrate mathematical principles only and are not intended to predict or project the return of any actual investment. Insurance products are offered through Madrona Insurance Services, LLC, a licensed insurance agency and affiliate of Madrona Financial Services. Some products discussed in this article are only available to accredited investors and are offered solely through the issuer's offering documents. The issuer determines whether to accept any individual’s subscription documents.

About the Author

Brian Evans, CPA, PFS

Owner, Madrona Financial Services

Brian Evans is the owner of Madrona Financial Services, Madrona Funds, LLC, and Bauer Evans CPAs and serves as the firms' chief investment officer, lead planner and senior portfolio manager. He was honored to ring the bell on the NYSE. Evans also hosts a weekly radio show on KTTH 770 AM, KRKO 1380 AM and KVI 570 AM, is a nationally published author and has been a regular guest on New Day Northwest, CNBC and Fox television.

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