Retirees concerned about outliving their money received a new tax-advantaged tool from the feds last year called a qualified longevity annuity contract — or, as the Aflac duck would pronounce it, a QLAC.
Is a QLAC right for you? Maybe.
Designed as a cheaper, more straightforward version of the costly, frequently indecipherable deferred income annuity, QLACs allow you to place up to 25% of your IRA or 401(k) balance (to a cap of $125,000) into a longevity annuity. You then select the start date for your payments, up to age 85. Until then, the money in your QLAC is not subject to the government’s required minimum distribution, or RMD, rules, which dictate that payouts from your IRA or 401(k) begin at age 70 1/2.
Financial planner Jeff Cutter, president of Cutter Financial Group in Falmouth, Massachusetts, says the RMD deferral can be a solid boon to some boomers.
“We did the math on one client recently and when you peel off $125,000 into the QLAC, if he doesn’t turn on the income until he’s 85, it will save him close to $80,000 in RMDs,” he says. “It was like giving him a pay raise.”
The catch is, you must:
“You can access flexibility, so you can pull those payments 5 years earlier or have them start 5 years after the original date,” says Bill Johnson, executive vice president of actuarial for Fidelity Investments. “The challenge with that is, should you need long-term care outside that 10-year window — and the biggest risk is earlier — you really can’t access these assets.”
Employers have shied away from offering lifetime income options because of confusion over their fiduciary duty with respect to the selection of annuity products. Just 12% of employers offered them in 2014, according to Towers Watson.
In July, the Department of Labor clarified that the employer’s fiduciary duty to monitor an insurer’s solvency ends when the product is no longer offered to its workers. Workers have just 6 years from the time their QLAC is purchased to file a breach of fiduciary duty lawsuit against their employer if the insurance company goes belly up. That means employers will be off the hook if workers don’t discover the problem until much later, when they’re expecting to receive payments.
Want to pass that money on? You can add a cash refund death benefit, which guarantees a return of premium to your spouse or heirs. Unfortunately, that can prove costly.
“The payouts are much lower with the death benefit,” says Jeremy Kisner, a senior wealth adviser with Surevest Wealth Management in Phoenix. “The whole idea is, this is just for longevity risk,” the risk of living longer than expected.
And to address longevity risk, Johnson agrees the new QLAC product is best served straight.
“Most people like the idea that someone will get their money back, but the way to really take advantage of these is to buy the product that doesn’t have a death benefit associated with it,” he says.
While you’re giving yourself that RMD pay raise, Cutter suggests springing for a cost-of-living adjustment rider as well.
“I ask my clients to think back on what they paid for their first house or a gallon of gas back then and they all start smiling,” he says. “Then I say, if you’re going to live to 90 or 95, what do you think is going to happen to your income stream if it’s fixed? An inflation hedge is extremely important.”
Given that QLACs are little more than a year old, only about a half-dozen insurance companies offer them, according to ImmediateAnnuities.com.
Kisner warns that prices vary widely. He ran major brand quotes for the identical $125,000 QLAC for a 65-year-old male to start at age 85 and the projected monthly payouts ranged from $3,300 to $6,183.
“There’s no industry standard because they don’t have the claims experience yet,” he says. “This could be a golden (shopping) opportunity for consumers.”
But Johnson says don’t expect to find QLACs as readily available online as, say, term life policies.
“We really think people should buy QLACs only as part of a comprehensive plan,” he says. “We don’t envision people buying these online.
“We do have a tool online where people can go and obtain quotes and find out what’s available out there, but we don’t have a mechanism for them to then go and execute that purchase without actually talking to somebody and putting a plan together,” Johnson adds.
Who’s the best candidate for a QLAC? That can depend on your health and wealth.
“The prototypical scenario would be that at age 65, you put this into place as part of your retirement income plan and set it to turn on at age 85, so it serves as pure longevity insurance,” says Kisner. “The nice thing about waiting until 65 is, if you don’t have any medical issues by then, there’s a good chance you’re going to live into your 90s and have a chance for this to pay off. If you already have a health issue that’s going to reduce your longevity, however, maybe a QLAC is not the way to go.”
Johnson says your projected income needs in retirement also play a factor.
“I think the ideal candidate would be that person with $500,000 to $1 million in their IRA so they can take advantage of the $125,000 limit,” he says.