DIY Annuity

Building a DIY annuity is a long, careful process.

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Do-it-yourself annuities have become a popular alternative to buying a packaged annuity from a financial services firm. One reason is the percentage relationship of the fees to income payments. In the low interest-rate period following the credit crisis of 2008, payouts to annuitants on new annuity contracts declined, because the bonds they contained paid less in interest, and this meant the fees ate up a larger percentage of the investment return.

What Is an Annuity?

There is no mystery to an annuity. It is simply a portfolio of bonds and income-paying stocks that is structured to earn enough income to pay out a specified monthly income. The insurance company issuing the annuity charges a fee for creating and monitoring the portfolio and for guaranteeing payment of the monthly income throughout the period contracted. With careful selection and a disciplined investment process, you can build your own annuity.

Benefits of a DIY Annuity

One of the prime features of a DIY annuity is the absence of fees, so you get full advantage of the money earned by the securities in your portfolio. Since you own the securities, if they rise in value, your principal also rises. And you often can borrow against the principal with very little difficulty if you have a margin account at the broker holding your securities. It also allows you to make decisions about what securities to buy for the portfolio, depending on whether bonds, preferred stocks or conservative dividend-paying stocks present more value.

How to Start

Open a tax-deferred brokerage account such as one of the many retirement accounts available. Unless you are extremely knowledgeable in the process of conservative investing for long-term income, take advantage of any advice available through firm research or brokers. Bonds and preferred stocks are the traditional core securities that go into annuities, because they have fixed, regularly scheduled income payments. Some common stocks, such as utilities, that have long histories of reliable dividend payments, may also be appropriate for your portfolio. However, the key to success in building an annuity is buying only securities that will reliably pay as expected. On a spreadsheet, list your securities with their payment dates, the amount to be paid and maturity dates. Build the annual income over time with added money and new securities purchased in the portfolio until it can accommodate monthly payments of the amount you need.

Problems to Consider

Before you start your DIY annuity, consider whether you have the self-discipline to build and monitor a long-term portfolio without trying to trade it except in times when it is necessary to get out of a failing security or reinvest accumulated extra income. You will also need patience to figure out the annual income produced and the monthly income that can be paid, reserving as much as possible for reinvestment to grow your principal. If you know very little about picking appropriate securities, consult a professional adviser. Constructing a successful annuity takes dedication and effort, and constructing it to your best advantage requires choosing the best account vehicle for your needs as well as the best securities to buy.