"I have an annuity but I need cash now."

[David Hayden]

If you're in the US, you've probably seen ads on TV with the subject line in the jingle. The company says that if you have an annuity, they can give you cash now. I assume that they buy it from you ... and that they try their hardest to conceal that fact.

Here are two fun questions:
1. What is a fair price to get for an annuity? How would you calculate it? For example, if Joe is 40 years old and gets $100/month from an annuity, what is a fair price for him to sell it? If you aren't familiar with the term, an annuity pays a fixed dollar amount until you die and then has no value. In other words, your heirs don't inherit the payments. They simply stop.

2. Slightly harder: suppose you are due a pension and the company wants to buy it out. What is a fair price? How would you calculate it? For example, if Jane is 40 and is due to receive a monthly pension of $500 starting at age 65, what is a fair price to pay her today to buy it out?

You have to make lots of assumptions here. What are reasonable values for them?

I faced the second question several years ago. The company was offering about 1/4 of what I estimated to be a fair amount. I'm glad I didn't sell it.

Dave