Ida May Fuller was the first Social Security beneficiary. Ms. Fuller paid $22.54 of social security taxes before her retirement in 1940. Dying in 1975, Ms. Fuller enjoyed Social Security benefits totaling $22,888.92 collected over 35 years. If Ms. Fuller had passed away before retiring, her total benefits would have been zero. Social Security is a government-sponsored retirement income assurance program paid via a tax on wages and other earned income. The tax is akin to an insurance premium with benefits that terminate at death.
A Qualified Longevity Annuity Contract (“QLAC”) is a new type of deferred annuity contract defined by IRS regulations issued in 2014. A QLAC policy is issued by an insurance company and is not part of the social security system. Still, both programs share the common attribute that beneficiaries collect benefits for life. Both Social Security and QLAC policies are a form of insurance – providing an income benefit for the life of the participant. Both share the fundamental attribute of assuring that the participant receives a defined cash flow during his or her lifetime. QLACs and Social Security share other similarities and have essential differences. The table below contrasts the attributes of the two plans and will help explain QLACs by the comparison.
Editors Note: Since this article was first published the lifetime limit for a QLAC purchase has increased from an original $125,000 in 2014 to $130,000 in 2018, then $135,000 in 2020. It may increase in future years.
The above chart does not touch upon many details of both the Social Security program and QLAC annuity contracts. Still, it does capture the essential features of the two plans. Despite the differences noted above, a QLAC contract has a distinct resemblance to the Social Security benefit plan. The QLAC benefits are designed to assure benefit payments in later life when IRA (or other qualified account savings) may be depleted. The most common shared attribute is that both provide a lifetime of set cash flows during a beneficiary’s retirement – no matter how long he or she lives. The long term adequacy of IRA (or other qualified savings) accounts is assured by a QLAC purchase because it pays benefits for however long the beneficiary survives. Social Security income is simply a floor to prevent retirees from living in relative poverty.
A QLAC is a new and vital retirement planning tool. There is no benefit for a person without tax-qualified savings.
Further, those persons with significant qualified and other savings (say, more than a $1 million) have less risk of running out of money during an extended life span. In between - where qualified savings range from $100,000 to $1,000,000 – the prospect of a long life presents a real risk of running out of savings and, as a result, reduced quality of life. For these retirees, a QLAC can assure a stream of retirement cash flow that supplements their Social Security benefits – no matter how long they live.
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