CGAs Are Highly Sensitive to Market Volatility
CGAs are more sensitive to market volatility because the charity owes fixed payments to annuitants. When the rate of return for a CGA pool is not high enough to sustain payments for the annuitants' lives, the charity needs to make up the shortfall.
The Timing of Returns Has a Significant Impact
Related to market volatility, timing risk can also impact CGAs. If the investment returns are lower in the early years of a CGA, there is a greater chance that the gift will be exhausted before the annuity matures, even if market conditions improve.
Longevity Risk Is a Key Consideration for CGA Pools
If annuitants outlive their expected actuarial mortality, the non-profit will need to make more annuity payments than originally calculated when the gift was funded.
Concentration Risk May Affect the Pool's Long-Term Health
If a CGA pool's assets and liabilities are concentrated with a small number of annuitants, even short periods of underperformance can make meeting financial obligations to annuitants more challenging.
Key Metrics Can Help Non-Profits Manage Risk
Calculating metrics such as the average and median ages for annuitants, the gift's effective payout and projected years to exhaustion, the projected remainder value for the charity, and the annual distributions by annuitant will help non-profits assess their CGA pools.
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