By Cindy Szymanski, CFP®, Financial Advisor
Cindy

 

The Treasury Department is sure to make the latest acronym in the retirement investing world more popular: The “QLAC” or Qualifying Longevity Annuity Contract. This past July, the Treasury Department issued final rules on this investment product in order for Americans who may have inadequate retirement savings save more for retirement. So what is a QLAC?

A QLAC is a type of deferred income annuity that you purchase within a retirement plan, like a 401(k), 403(b) or a traditional IRA. Funds used to purchase this product typically can’t be withdrawn until you start taking distributions when you reach a certain age( usually your early eighties), though payouts must begin by the time you reach 85. In essence, you are giving a lump sum of money to an insurance company now for guaranteed payments in the future. Prior to these final rules, deferred income annuities were purchased with after-tax funds in non-retirement type of accounts. If you haven’t been saving much for retirement, will not be receiving a pension and are worried about some sort of set income stream in your retirement years, this product may be suitable for you with a portion of your retirement funds.

In a nutshell, the final rules eased some requirements that may entice more individuals to purchase this type of product in their retirement accounts(s). These revisions include:

1. You may designate 25% of your retirement plans or up to $125,000 (whichever is less) to a QLAC. The QLAC portion of your account will not be subject to the 70 ½ minimum required distribution (RMD) rules. The logic of the government with this rule is that you are extending your retirement assets by not being required to use this portion in the calculation of your required distribution for up to 15 years (since you must begin distributions from the QLAC by age 85). But let’s not forget that we pay for this feature by limited growth potential of the QLAC, which is an annuity. Also, by having to take less of a distribution, the assumption is your overall tax bill after you reach 70 ½ should be less.

2. If you die before you start taking distributions from the QLAC, your principal amount can be left to your beneficiaries. So, in essence, you have a return of premium feature for part of your retirement accounts, no matter what the stock market does. For someone that does not have longevity in their family history and does not feel confident about living well past their mid-eighties, I would not recommend investing in this type of product.

If you are considering a QLAC, the earlier you buy into one, the greater your future payments will be. An analysis done by bankrate.com, shows a male who pays $50,000 for MetLife’s QLAC product at age 50 would receive annual income of $42,997 once he reaches age 85. He would receive about half that amount ($21,741 per year) if he waits until 60 to purchase a QLAC and only $15,439 if he waited until age 65. Since women tend to live a little longer, the amounts above would be slightly less. Just remember that the above figures would be in year 2049 dollars. So, you might be saying to yourself $42,997 per year sounds like a slam dunk if I only have to invest $50,000 today. Not true – as you can be sure that amount will not have the same purchasing power in 2049 as it does today.

While this sounds like a good way to save for retirement, let’s not forget that you are giving away a lump sum of cash for what could be 30 or more years; cash that you cannot take back without taxes and potential penalties. While there are varying types of products that will offer you more flexibility and even possibly inflation protection – they are not free and you will pay for them either in more premiums or a lower payout.

Even though a deferred annuity provides a guaranteed payment to you, it is still an annuity product and if purchasing one, you must read the fine print to know what you are buying and at what costs. You also want to make sure that the insurance company is stable and will be around in the future. Remember, this is a long term contract; even if you purchase at 60 or 65, you will not be collecting for 20 or more years, so you want to make sure the insurance company will still be there when it comes time to make payments to you.
On the other side of the coin, individuals who have various accounts for saving for their retirement years probably do not need this product. They can do just as well in setting up a safe withdrawal amount from their accounts without a QLAC; especially if they have a good financial advisory firm, like Bloom Asset Management, Inc., to guide them along the way.

It may take a while for your employer to begin offering this product in your workplace retirement plan if they are not currently doing so, but you can purchase one in your IRA. Whatever you decide to do, make sure you do your homework and know what you will be getting and for what price – good luck!