The QLAC Strategy:
Balancing Longevity Risk in Your Retirement Plan
What is the purpose of a Qualifying Longevity Annuity Contract (QLAC)?
The key word is longevity. People are fearful they will outlive their money. Some people come from a family where relatives have lived into their nineties or are in the centurion club.
Long-Term Care Considerations
Seventy percent of those 65 today will need some form of long-term care. The cost of care giving can be daunting. Long-term care insurance can minimize the cost. However, if you are uninsurable, the cost of care giving can deplete your wealth. This is more traumatic for a couple – you do not want to leave the healthy spouse destitute.
In these cases, a QLAC can provide a guaranteed stream of income that starts at a specified age up to age 85 and continues for the rest of your life. This offers protection against longevity risk and is a cushion for possible long-term care costs.
QLAC Features and Benefits
You can set aside up to $200,000, or 25% of your retirement assets (whichever is less), in a QLAC. The QLAC is not subject to RMDs (Required Minimum Distributions) which begin at age 73. You can defer distribution up to the age of 85. Being able to defer RMDs may reduce your taxable income and potentially your tax liability.
The fixed payments from a QLAC are not affected by market performance, providing a stable income source regardless of economic conditions. You may want to add options like spousal coverage, cost of living adjustment (COLA) and a return-of-premium.
QLAC Restrictions
However, QLACs do have restrictions. You can’t access the funds until the payouts begin. You may use only fixed income annuities. You can’t use indexed annuities or variable annuities that may benefit from market increases.
QLACs can offer two death benefit options: a life annuity (rules can vary depending on several factors) and a return-of-premium option. These are the potential death benefit options allowed by the tax code. That doesn’t mean every QLAC contract will offer these options.
QLACs are irrevocable. You cannot change your mind or adjust the contract terms once its established. You want to have a well-thought-out financial plan. Consulting a financial advisor or tax professional may be beneficial.
Choosing a QLAC Provider
Since the annuity is supposed to pay a lifetime benefit, you want to be sure the annuity company is financially strong. AM Best, S&P, Moody’s, and Fitch are organizations that rate the financial strength of insurance companies. You want to be sure that you have a highly rated company that will weather economic storms and keep paying your stream of income.
QLACs may have a place in your retirement plan. They may give you a pathway to enjoying your retirement without the fear of running out of money.
