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Articles, wit and wisdom about retirement planning, tax management and living a long life.


A No-Regrets Retirement Guide for Procrastinators

 It is utterly false and cruelly arbitrary to put all the play and learning into childhood, all the work into middle age, and all the regrets into old age.  -- Margaret Mead

In your fifties or sixties? 

If you’re like most people our age, you may have a regret or two. 

Research by Cornell Psychology Professor, Thomas Gilovich, shows what we regret most in life is not the mistakes we’ve made in the past. Instead, the things we didn’t do produce the most regrets. It turns out that we regret the most are the times we failed to act.

Regrets and Retirement Planning

Nowhere is this truer than in retirement planning. For most of us, our regrets span both saving for retirement (never enough) and failure to manage our retirement once it has started.  

Rare is the individual who can say that they have it completely together in planning and managing their retirement.  If you feel this failure applies to you, it turns out you are in good company. A 2018 Northwestern Mutual study found that 21 percent of Americans of all ages have nothing at all saved for the future. Another 10 percent have less than $5,000 saved for their golden years. A 2017 study by Government Accountability Office (GAO) analyzed retirement savings.  The study found the median retirement savings for Americans between age 55 and 64 were $107,000.  The reasons for our nation’s savings shortfalls are as varied as people themselves. Examples include: 

  • Failure to get into the retirement savings habit;
  • Unexpected and uninsured loss of an income provider;
  • Divorce; 
  • Protracted family illnesses; 
  • Education expenses or debt; 
  • Investments that have gone awry. 

Professor Gilovich would tell us that no matter what the reasons are, they don’t matter now. What is important is what happens next. Professor Gilovich advises that we tackle our potential future regrets head-on. “As the Nike slogan says: ‘Just do it’; Don’t wait around for inspiration, just plunge in. Waiting around for inspiration is an excuse. Inspiration arises from engaging in the activity.”

How to “Just do it” for your retirement?

What follows is a short guide to “just doing it.”

1. Start by calculating retirement assets and income. Your first step should be to look at your financial situation with the long view in mind. First, add up your existing assets. Factor in social security (click here to see the social security administration’s benefits estimator). The benefits estimator tool may provide you with some important insights into how long you will want to keep working. For example, while you may start to receive Social Security at age 62, you should study your options. The Social Security Administration pays a smaller benefit to people who begin receiving payments at age 62. It pays more, for example, to people who wait until age 66 or age 70. If you enjoy what you are doing, are in good health, and can keep working, you may enjoy receiving benefits later. Indeed, Social Security benefits increase every month you do not take them until you reach age 70. After a retiree’s 70th birthday, there is no economic benefit for continuing to wait. For more on this topic go to the Social Security Benefits Planner. You may also find useful an article about the tradeoffs between taking early and late distributions in this article by the Motley Fool.

2. Project Living Expenses in Retirement. You need to look at what you are going to need in retirement to cover your expenses.  Be sure to include rent, food, medical expenses and other costs of day-to-day living. If there is a shortfall – and there is for many of us – don’t panic.  No matter how small your savings is now, the most important thing you can do at this stage is to begin. Start by projecting what your expenses are. 

3. Start Problem-solving. Here are some examples of places in your budget where you can find money:

a. Save on Housing Expense. A smaller home or apartment may make sense now.  Many of us with grown children live in houses that are far too large for our needs.  Moving to a smaller home in a different state, county, or even a school district can be liberating. Such a transition can mean less monthly living expense and less day-to-day maintenance. Often, the result is a net improvement in the quality of life.

b. Save on Debt. This time of life is often a great time to pay off credit card debt built up over the years.  Helping your kids through their various stages in life can create credit card debt.  Debt consolidation either using home equity or other forms of credit can make sense. Also, it may be a good time to explore refinancing to a 15-year mortgage. A fifteen-year mortgage may move you to a net higher payment. Paying off your mortgage in your fifties and sixties paves the way to rent-free living in your seventies and eighties. Even more enticing, after age 62 a reverse mortgage becomes an option. 

c. Save on Day-to-day Expenses. Don’t be ashamed to grab senior discounts, they are everywhere. Look for them in grocery stores, movie theaters, ballparks, hotels. Finding and using these discounts can become a part of your routine. To get you started, here is a list of senior discounts

d. Consider Small Investments that Reduce Your Living Expenses. For example,  you can reduce your electricity costs. Many states provide incentives for residential investments in solar power and geothermal heating and cooling. The Federal Government also provides an investment tax credit for these kinds of investments.  Start a garden. If you spend a lot of money watering on your property, a humble rain barrel can provide decades of savings on irrigation.

e. Consider Working Longer. For those who are able, keeping working post-retirement is a sensible way to fill up the savings tank. This may mean a transition to a second career which may be different from what you pursue in the present. For example,  after working many years in larger companies, you may move to more entrepreneurial endeavors. Self-employment means never having to face mandatory retirement! Whatever you choose, remember that you have many, many life skills you can leverage.

f. Increase Retirement Savings as You Can. There is good news from the US government. Believe it or not, Uncle Sam has created incentives for you to save in your later years. Provisions for retirement planning procrastinators include “catch-up contributions.” The catch-up contribution provides for accelerated retirement savings after age 50. The limit for employees aged 50 and over who take part in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan (2019) is $6,000. The catch-up contribution limit for individuals aged 50 and over to the Individual Retirement Plan is $1,000. To learn more follow the link to IR-2018-211 released by the Internal Revenue Service on November 1, 2018.

g. Reduce your Medical Expenses with Medicare. If you are within three months of your 65th birthday, you can sign up for Medicare. Medicare is the national health insurance program for people age 65 or older. Part A helps pay for inpatient care in a hospital or skilled nursing facility. Part B helps pay for doctors’ services and many other medical services. Most people age 65 or older are eligible for free Medicare hospital insurance (Part A) if they have worked and paid Medicare taxes long enough. You should sign up for Medicare hospital insurance (Part A)  3 months before your 65th birthday.  Sign up even if you do not want to begin receiving retirement benefits at that time. Anyone who is eligible for free Medicare hospital insurance (Part A) can also enroll in Medicare medical insurance (Part B).  You enroll in part B by paying a monthly premium. Some beneficiaries with higher incomes will pay a higher monthly Part B premium. If you do not choose to enroll in Medicare Part B and then decide to do so later, your coverage may be delayed and you may have to pay a higher monthly premium. To learn more about Medicare, follow this link to the Social Security Administration’s Medicare Page

h. Postpone Income and Required Minimum Distributions. As of January 1 2020, retirees who reach the age of 72, have until April 1 of the next year to take their first Required Minimum Distribution (RMD) from their qualified retirement plan(s).  They have until the next December 31 to take their second distribution. Those individuals whose employer retirement plans allow it and who may continue to work after their 72nd birthdays may wait until the year they retire to take their first Required Minimum Distribution. For more on this topic see the IRS Topic Page on Required Minimum Distributions

i. Use a Qualified Longevity Annuity Contract (QLAC) to Cover Income Needs in Later Retirement Years. For many, retirement funds are limited. If you are concerned about outliving your retirement assets, a QLAC is a great way of assuring yourself income later in retirement.  QLAC income must begin before you reach your 85th birthday but can last for the rest of your life. Click here to watch a seminar by QLACguru Ray Ryan describing this strategy then try our Failsafe (sm) Maximize Income Calculator to see how this strategy might work for you.

j. Mark your Calendar. Retirement is not a single event, but a process to be managed. To get started, follow the link to Calculate the important future dates of your retirement. Start studying your options and setting goals.  Be prepared to address each of the milestones as they arise at age 50, 55, 62, 65, 70 and 70 and one-half. 

Once you’ve done this homework, it may be time to hire on a financial advisor to help you grow your assets. But pick her or him carefully. Like Charles Barkley, you need to, “take the shame out of your game.”   Never allow a prospective advisor to ridicule the size of your portfolio. If he or she does, find another who won't.

After all, it’s not about what you have now, but what you can have in the future.  

Welcome to the next 30 years of your life!

Want to learn more? Check out our videos page to see additional QLACguru videos.  See our calculators page to develop an anonymous RMD calculation and estimated QLAC quote. Answer specific questions by going to our Knowledgebase page.  Visit our blogs page for in-depth articles on a variety of topics including how QLACs help with sequence Sequence Risk, how QLACs are similar to and different from Social Security, as well as many other topics. Free Consultation.  If you would like us to develop a free RMD analysis and illustration of how a QLAC might work for you, please click here.

Who Should Buy a QLAC (And Who Should Not?)

 Introduction

Who should consider buying a Qualified Longevity Annuity Contract (a “QLAC”)?  Who should not? 

A QLAC is a general account annuity that meets tests established by the Internal Revenue Service (“IRS”) in 2014.  The QLAC’s start date can be as late as the buyer’s 85th birthday.  The annuity payments continue for the life of the buyer (or the buyer and spouse). In this respect, the distributions are somewhat like social security benefits, except they start later. A QLAC premium (A Cap is described below) is withdrawn from a traditional IRA[1] without triggering a taxable distribution.  The IRA asset account is reduced by the premium distribution for purposes of computing the Required Minimum Distribution beginning at age 72.  Because the QLAC premium distribution was not taxed, the QLAC annuity payments are all taxable upon receipt.  (Please try our RMD and QLAC annuity benefit calculator to see how this works.)

Why Not Buy a QLAC?

At the latest, planning for retirement should begin in one’s early sixties or at least sometime during the decade after that. Some people will not be concerned about running out of savings during their retirements.  Below are examples of persons who are unlikely to be QLAC buyers:

  • A beneficiary of a defined benefit plan that provides a large, fixed benefit for life;
  • An owner of defined contribution plans (401(k)s, IRAs, etc.) with combined asset balances more than $1.5 million;
  • An investor with a portfolio of assets that generate adequate income to meet retirement living expenses;
  • An individual whose retirement planning focus is about to whom her estate will be distributed; and
  • A person with a limited life expectancy due to a disability or illness.

It is hard to imagine any of the above persons buying a QLAC unless their focus is purely on tax deferral.  

Who Should Consider Buying a QLAC?

There are many more who should consider a QLAC in their retirement planning. Examples of people who look into a QLAC include:

  • An owner of defined contribution plans (e.g., 401(k)s, IRAs) with combined asset balances less than $1.5 million and who has no defined retirement benefits;
  • Someone concerned about becoming a burden to his or her children during retirement; 
  • A taxpayer whose social security benefits will be a material part of his or her retirement income;
  • A person with no assets outside a home and defined contribution savings; and
  • Someone in good health and with a family history of longevity.

 Fear of out-living one’s assets is the common concern of people in this second group.   Social security benefits, in of themselves, fall short of their living cost in retirement. Further, most do not want to ask for financial help from their children or other relatives.   As a result, they want to find a way to make their savings last for life.

A QLAC addresses this concern by creating a lifetime cash flow starting before age 85. With a QLAC purchased say 15 years earlier, the annual benefit can equal anywhere from 25% to 35% of the premium.

To date, QLACs sales have not caught up to the need in the marketplace. Why?  The product is less than four years old. Many future and current retirees are not aware that QLACs exist.  Others have heard of QLACs but from a party with a vested interest in maintaining funds under management who have made a negative comment.  Below are criticisms and rebuttals.

Life Expectancy

Here, an argument is made that a retiree can make his funds last for her life expectancy. As previously noted, projected mortality is part of the criteria in deciding whether a person is a QLAC candidate. People with terminal diseases have short life horizons. Others, with less cloudy futures, ask, “How long can I expect to live?” The only way to answer the question is to look at an actuarial table. Still, it is essential to look at the right table.

          2016 Table for a 65-Year-Old  Sex                    Life Expectancy

          Social Security Administration      Female             21.6 years (i.e., age 86.6)

          SOA Annuity Table for 2016          Female             25.1 years (i.e., age 90.1)

For retirees with savings, the Society of Actuaries table is the right choice.  Longevity has been shown to correlate with income and savings.  The Social Security table includes low-income earners and those who have failed to save. The Society of Actuaries table focuses on a more narrow mix.

The definition of, “Life Expectancy” is also important.  The term does not mean that a group of like-aged (a “cohort”) females will all die when they reach their life expectancy (e.g.,. age 90).   Instead, it means that of an original cohort, 50% of the group will be deceased and 50% will be alive when the survivors reach age 90.  Further, the Society of Actuaries predicts that at age 100 10% of the original cohort (i.e., 20% of those alive at age 90) will still be with us.  At age 105, about 1% will still be living.

Of course, on average males die before females. The Society of Actuaries predicts a male age 65 has a life expectancy of about 23 years.  The slope of the male mortality curve follows the female curve – 10% of the males make it to age 98. 

Life expectancy increases when the actuaries compute the survival probability for at least one of a married couple (born on the same day).  At age 65, that life expectancy becomes 29 years or age 94.

So, it is incorrect to predict that savings need only last to one’s life expectancy.   There is a reasonable chance that each of us may live ten years or more past our actuarial life expectancy.  Indeed, life expectancy has been growing and will continue to increase as medical treatments improve.  No matter how long it may be, providing for the tail end of life is what a QLAC is all about.

'Bad Investment' or Good Insurance?

Some money managers have branded a QLAC (and other life annuities) as bad investments. Still, a QLAC is not an investment – it is an insurance contract.  It pays no matter how long you live.  It does not pay after you die, i.e., when you no longer need the money.

Analogies abound. Social security is an example, although it is a mandatory government-sponsored plan.  On every payday, the employee and the employer pay into the social security trust fund.  After retirement (for social security purposes), each month a social security distribution is paid to the former employee – until he or she dies.  If an individual dies before benefit eligibility, their estate receives nothing – there is no refund of social security taxes previously paid to the government.

The same logic applies to defined benefit pension plans sponsored by private employers.  The plan sponsor contributes to the pension plan fund, and after retirement, the program pays a scheduled benefit – until he dies. An early death does not trigger a plan refund to the employer or the employee.

To summarize, a QLAC converts a portion of retirement savings from a defined contribution plan into a defined benefit plan. That conversion is what creates peace of mind for QLAC buyers - they have covered their late in life living costs no matter how long they live.

Early Death Refund

Unlike social security or a defined benefit pension plan, QLAC buyers can elect a Return of Premium (“ROP”) policy option.  This election provides that when a beneficiary dies, the cumulative distributions have to equal at least the premium paid.  For example, assume a QLAC premium of $20,500 and a scheduled benefit of $5,000 per year.  If the QLAC owner dies after collecting two years of $5,000 ten, then his or her estate will receive a ROP check for $10,500. 

There is an intuitive appeal to getting your money back with a ROP election. Still, the annuity benefit amount is reduced when a ROP election is made. It pays to examine annuity benefits with and without ROP to examine the tradeoffs.  Remember, a QLAC is about not being a burden on your children – a QLAC is not about creating an estate for children to inherit.

'Equities Are Better?'

From time to time, a money manager may argue that the stock market’s long-term rate of return is 10%.  For example, they will assume an annual 10% return on savings (the return rate does not apply to a QLAC) and the same retirement distributions with or without a QLAC. The basket without a QLAC will out-perform the basket with a QLAC.  The problem with this analysis is that the money manager will not and cannot give the IRA owner a guarantee that his recommended investments will generate a consistent 10% rate of return. Equities can be volatile – up and down. Long-term averages do not pay bills when the stock market declines 10% or 20% in a year of retirement. (Please see our article about the challenges of Sequence Risk for more on this concern.)


Insurance is a product for people who cannot afford a given risk or loss.  A car owner buys collision insurance because she cannot afford to replace her car. A QLAC buyer is doing the same thing – she cannot afford the loss of income in her later life.

No QLAC Surrender – Longevity vs. Liquidity

The IRS QLAC regulations state that the policy cannot have a surrender value.  The QLAC contract is irrevocable.  Once the premium is paid and the contract is delivered, there is no going back.  While reducing the flexibility of the contract for the buyer, this provision enables the carrier actuaries to create the highest payouts.  If the risk of surrender were a factor, the annuity payments would be much lower. (Consider the effect of the ROP election discussed above.)

To be sure, a QLAC is not a liquid asset.  A QLAC should not be used to fund discretionary spending. Instead, the focus should be on funding the projected annual cost of living.

Also, note that the IRS created a maximum lifetime QLAC premium per participant.  The QLAC premium(s) cannot exceed the lesser of $135,000 or 25% of the IRA fair market value (the “Cap”).  After a QLAC premium withdrawal, 75% or more of their IRA assets remain to invest in stock or bonds. To meet living expenses, the owner can withdraw from the IRA before the QLAC annuity start date.  For most retirees, these withdrawals can equal the future QLAC annuity amount. Also, the withdrawals can continue until the QLAC annuity start date[2].

Carrier Ratings & Persistency

Insurance companies issue QLAC contracts.  After the initial deferral period of 10 to 20 years, the underwriter will be paying benefits for decades after that.  This payment stream is like a corporation issuing a bond for 30 to 40 years, except there is no defined termination date with a QLAC. 

How secure is the carrier’s promise to pay? There are over a dozen top insurance companies that offer QLACs.  Without exception, each one has a long history and has high industry ratings.  (See our carriers page to see the year founded and AM Best's ratings of leading QLAC carriers.)  Other than tax rules, there is no federal government oversight of the insurance industry. Instead, the states regulate and license the insurers.  The states collect premium taxes where the insurance companies do business.

To date, carrier bankruptcies have been rare. When a carrier did become insolvent in the past decades, the state’s insurance department took control of the company. During the rehabilitation, the regulators' primary goal is to protect the policy owners. Often, the solution is to move policies from the distressed company to another and stronger carrier.  Essentially, the state insurance regulators is a performance guarantor of the carrier’s they regulate.

Silk Out of Sow’s Ear

Unfortunately, the old saying -No Silk out of Sow’s Ear – applies to QLACs.  If there are minimal savings in someone’s IRA, there is no way to convert 25% of a small number into a big number.  There must be available savings to purchase a QLAC - which generates a useful future annuity.

If a person wants to buy an immediate annuity[3], a QLAC should not be on the shopping list.  QLACs are only available as deferred annuities. QLACs perform best when the deferral period is ten years or more. Also, QLACs shine when the annuity start date is on or after the 80th birthdate of a QLAC owner. Three-quarters of one’s savings should be able to get a person to their 80th birthday or later. The purpose of a QLAC is to insure against longevity risk.


Summary

A QLAC is not for the person with no concern about running out of assets or savings during his or her lifetime. He or she does not have a risk to insure.

A QLAC provides income certainty during the later years of retirement.  Its distributions are for life.  This deferred annuity typically starts at age 80 or after.  A QLAC premium can be funded by a traditional IRA without triggering taxation of the allowed withdrawal. The amount of withdrawal cannot exceed 25% of retirement assets.  The limit is $135,000.

Candidates for a QLAC are those individuals that may outlive their savings. Most QLAC buyers have a reasonable expectation to survive well into their late 80s or 90s.

Want to learn more? Check out our videos page to see additional QLACguru videos.  See our calculators page to develop an anonymous RMD calculation and estimated QLAC quote. Answer specific questions by going to our Knowledgebase page.  Visit our blogs page for in-depth articles on a variety of topics including how QLACs help with sequence Sequence Risk, how QLACs are similar to and different from Social Securitybest practices in buying a QLAC as well as many other topics. Free Consultation.  If you would like us to develop a free RMD analysis and illustration of how a QLAC might work for you, please click here.





[1] In addition to an IRA, other Internal Revenue Code accounts can be used to fund a QLAC.  These are known as 401(k), 403(b) and 457(b) tax-qualified savings accounts. Herein, references to an IRA are meant to include the other three tax-qualified accounts.  Further, a Keogh savings account is not eligible for a QLAC withdrawal.

[2] The projection assumption is that IRA investments do not lose money in any withdrawal year. Each year can show a zero rate of return and still provide adequate withdrawals as described above.

[3] When annuity distributions begin within 12 months of the premium payment, the annuity is labeled as “immediate.” 


A Women Over 60? Here's Why A QLAC May Be Your Best Friend

By Betsy Ryan and Ron Ryan

Are you old enough to remember, “Diamonds Are a Girl’s Best Friend?” The song is from the 1953 Musical, Gentlemen Prefer Blonds starring Marilyn Monroe?[1]

The French are glad to die for love.
They delight in fighting duels.
But I prefer a man who lives
And gives expensive jewels!
A kiss on the hand.
May be quite continental,
But diamonds are a girl's best friend!

A kiss may be grand,
But it won't pay the rental
On your humble flat
Or help you at the automat.


Source: Marilyn Monroe - Diamonds Are A Girls Best Friend Lyrics | MetroLyrics 

Here is why these lyrics are relevant even today – more than 50 years later.  The average life span in America is growing, and women are living much longer than men.  A 2014 longevity study[i] predicts a 60-year-old woman has a 32 percent chance of surviving to age 90. If a woman celebrates the 80th birthday, there is a 42 percent chance of living to 90! A husband’s survival rates are much lower than those of his like-aged wife.  A woman's chances of outliving her husband at age 60 are a whopping 57 percent. [ii] Social Security actuaries developed these observations from the entire social security database, which includes the whole United States population.  If you are a 60-year-old woman who does not smoke and are generally in good health, the probability of outliving your spouse is even higher than the above percentages.

How to pay for all those Golden Years? 

In retirement, a QLACs may be - to borrow from the song -  “A girl’s best friend.” Here are a few basics:

  • A QLAC stands for Qualified Longevity Annuity Contract.
  • Available only since 2014, a QLAC provides a pension-like stream of annuity payments in the later years of retirement. 
  • A woman may buy a QLAC today, lock in lifetime monthly income starting at a future date of her choosing.
  • A QLAC allows her to defer benefit payments until age 75, 80 or 85 -- or anywhere between. The longer she waits for the payout, the higher the QLAC’s benefit payment. 
  • An IRA owner may buy a QLAC with IRA assets without incurring a tax penalty. She can use the lesser of 25% percent of IRA assets or $135,000 out of her qualified retirement account to buy a QLAC.  (For 2020 and after, the maximum QLAC limit increases from $130,000 to $135,000.)
  • The IRS calculates this limit per individual taxpayer. If both a woman and her spouse have IRAs, each may buy a QLAC.
  • Until benefit payments start, no required minimum distributions are payable on the QLAC assets. So, she defers taxes on whatever money she put into her QLAC.

Once the annuity starts, QLAC benefits will continue for as long as she lives.    Benefits will continue while she is alive -- even if she lives to age 100 or older. 

R-E-S-P-E-C-T Might Mean Q-L-A-C!

High net worth individuals do not often worry about running out of assets in retirement. They can use the so-called  ‘four percent rule’ to liquidate their portfolios.   With smaller portfolios (e.g., IRA assets between $100,000 and 1 million dollars), that 4% rule does not make sense. A Qualified Longevity Annuity Contract is an excellent alternative strategy. A QLAC can provide a reliable stream of payments throughout even the most extended retirement.  Indeed, a QLAC can outlast diamonds, gold, and stocks, and bonds, and (probably) your husband.  Although they have different start dates, social security and QLACs share the common attribute of payments for life to the beneficiary – even if that period is the next thirty or forty years.  

Now, before you go out and buy a QLAC, here are a few things to consider:

  • A QLAC is irrevocable. Once purchased, you cannot get the money back from a QLAC -- until it compensates you in the form of benefits. To make sure you get your premium amount back, you can buy the QLAC with a so-called “return of premium" rider.  A return of premium rider is a kind of death benefit. The benefit will pay your estate any unreturned premium in the event of death. Be aware that such riders come with a reduction of lifetime benefits.
  • A QLAC Payout Is Fixed. One of the main advantages of a QLAC is that it allows you to know today what you will receive in the future. If you think inflation is a risk, you can buy a rider that guards against inflation.  As with a return of premium rider, a cost/benefit tradeoff exists for the Cost of Living Adjustment (COLA) rider as well.  You should study the alternatives.
  • A QLAC is a life annuity issued by an insurance company.  Because of the “for life” feature, a QLAC is more like social security benefits than it is like investing in stocks or bonds.  As a result, the rates of return are low if the beneficiary dies early and high if the beneficiary is long-lived. One comprehensive study has shown that life annuities, in general, are the best choice for individuals funding for their essential living expenses for the duration of their retirement. The stock or bond alternatives run “sequence risk” or the devastating outcome of incurring investment losses in the early years of retirement.  Stocks and bonds are appropriate for individuals funding lifestyles (e.g., around the world trip), legacies for heirs and buffer assets for the unexpected. A QLAC is an assurance that there will always be a check to cover one's retirement living expenses.
  • A QLAC reduces your asset-based advisor’s compensation. Is your retirement portfolio managed by someone compensated based on assets under management? If so, don’t expect that manager to support the idea of a QLAC. A QLAC will reduce their compensation by up to 25 percent.  Be sure to review a QLAC investment with a genuinely objective advisor.
  • As with Diamonds, Be Sure to Choose A Real One! A QLAC is a type of Deferred Income Annuity, but not all Deferred Income Annuities are QLACs. Also, a QLAC is not a variable or index annuity.  Both those types of annuity have their performance tied to the stock and bond markets.  (Variable and Index annuities pay much higher compensation to the seller.)  A QLAC is designed and sold by the life insurance carrier as a Qualified Longevity Annuity Contract.

The QLAC was created by IRS regulation to help seniors who are living longer. Below is a summary of QLAC required features:

  • Must be a life annuity – single or joint with a spouse;
  • Must be a deferred annuity starting no later than age 85;
  • Only defined contribution account funds (e.g., IRA) may be used;
  • Roth accounts and large pension plans cannot participate;
  • The 25%/$135,000 premium limit applies to each;
  • No surrender values, but Return of Premium election is allowed;
  • The annuity cannot be variable or otherwise indexed to a market;
  • Annuity benefits are backed by the good faith and credit of carrier;
  • Up to the specified limited noted above, withdrawal from the retirement account to fund the QLAC (e.g., IRA) is not taxed;
  • Withdrawals do reduce plan (e.g., IRA) assets for RMD computations;
  • QLAC Annuity deferred payments are 100% taxed when received, but this will occur in the future when you are likely to have less income.

QLACs and Diamonds?

Every woman over sixty may want to consider a new ‘best friend’ in addition to her diamonds. She should take a proactive look at retirement assets with an eye for the long term. Later in life, a QLAC may be a “girl’s best friend.”

 

Want to learn more? Check out our videos page to see additional QLACguru videos.  See our calculators page to develop an anonymous RMD calculation and estimated QLAC quote. Answer specific questions by going to our Knowledgebase page.  Visit our blogs page for in-depth articles on a variety of topics including how QLACs help with sequence Sequence Risk, how QLACs are similar to and different from Social Securitybest practices in buying a QLAC as well as many other topics. Free Consultation.  If you would like us to develop a free RMD analysis and illustration of how a QLAC might work for you, please click here.

   

 

[i] See https://www.ssa.gov/OACT/NOTES/as120/LifeTables_Body.html

 


[1] Modern entertainers from Madonna to Beyoncé have borrowed from this iconic production.  While no doubt anachronistic, the song does raise a vital challenge -- how to pay the rent in our later years!  

 


8 Signs You May Need A QLAC

A Qualified Longevity Annuity Contract (QLAC)  – pronounced 'cue-lack' - is a new type of annuity product designed to insure against the risk of outliving retirement assets.  The QLAC investment was made possible by enabling legislation from the US Treasury in July 2014.  At that time, the Treasury issued final IRS regulations that defined QLACs.  The QLAC  product remains relatively unknown to the investing public. 

Briefly, an owner of a traditional Individual Retirement Account[1] (“IRA”) can transfer funds out of the IRA to pay a premium[2] to purchase a QLAC.  That transfer is not treated as a taxable event.  Instead, the asset balance in the IRA is reduced by the transfer/premium, thereby reducing required minimum distributions from the IRA.  (Go to qlacguru.com/calc to find a free tool to help project tax deferral amounts).  Only distributions from the QLAC are taxed to the owner, and such distributions can be deferred to as late as age 85.  Once distributions begin, they are paid for the life of the QLAC annuity owner[3], no matter how long he or she might live. (Click here to open a separate window on a partner site to see how much monthly income a QLAC purchase might generate.)

QLAC’s are not for everyone. Here are eight signs that you, an IRA owner, may be a candidate for a QLAC purchase. (For an infographic summarizing this blog piece, click here.)

1.       I am retiring or about to turn 72.  Age has an important bearing on when to make a QLAC purchase.  QLAC investors typically choose to make a QLAC purchase near retirement (for example, the early to late sixties), or upon reaching the age of 72.  Here is why.

·         At Retirement.  At retirement, many retirees choose to or are required to move their assets from their employer-sponsored retirement accounts (e.g., IRA, 401(k) or 403(b) accounts) into an individually managed IRA account. At that time, retirees are faced with their first decision whether to purchase a QLAC.

·         At Age 72  The next most common time to evaluate QLACs is when an IRA owner approaches age 72. This milestone is the age at which IRS accounts[4] will be required to begin taking  Required Minimum Distributions (“RMDs”), or the owner will subject to severe IRS penalties. For those outside the top 5% in income, the question becomes one of measuring the income security from a bond portfolio versus the guaranteed income from a QLAC.  Also, to be factored in is the tax cost of RMDs without a QLAC versus the savings from reduced RMDs with a QLAC. Go to  qlacguru.com/calc to find calculators that will help analyze how much one may contribute to a QLAC and the tax deferral impact of a QLAC purchase.

2.       I am healthy and expect to live for a long time.  Good health and likely longevity are key variables in deciding whether to purchase a QLAC.  For example, take a 69-year-old male smoker with a history of cancer and heart disease in his family.  This man is highly unlikely to see his 80th birthday. A QLAC is probably not for him. This is because the QLAC has no cash value and cannot be undone after purchase.[5] On the other hand, for a 69-year-old-female in great health and with a family history of great longevity, a QLAC purchase can make a good deal of sense.  QLAC annuities payments will continue for life, even if she lives to be 105!

3.       I have retirement assets.     Most insurance carriers offering QLACs have $15,000 minimum premium.  Immediateannuities.com prefers to sell QLACs with a minimum purchase amount of $20,000.  This translates to a minimum IRA balance of $60,000-$80,000. The overall premium limit of $125,000 is 25% of $500,000 of IRA assets. The Qualified Longevity Annuity Contract or "QLAC" premium purchase is limited to 25% of a retirement plan (i.e., assets held in tax-qualified accounts such as an IRA), but no more than $135,000 from all plans.  (The $130,000 lifetime limitation was increased to $135,000 on January 1, 202- and will increase from time to time thereafter.)  As the QLAC premium falls as a percentage of a persons’ IRA assets (over overall assets), the relative impact will decline.  But if two members of a couple each own separate IRAs, both members may purchase a QLAC, subject to the previously mentioned limits.

4.       I have an estate plan in place.  Most parents want to avoid becoming dependents of their offspring.  A QLAC is designed to do just that – lifetime income prevents one from becoming a dependent. On the other hand, a QLAC is not a tool to build an estate.  Typically, the QLAC purchaser’s gift to the next generation is freedom from the need to financially support and physically care for the prior generation.    Go to the Get Quote tab on the right-hand side of the page on QLACguru.com to see how much income a QLAC purchase would provide.

5.       I can use some help staying on budget.  By the time we reach our sixties, some of us are very good at living on a budget.  Others are not.   A person with too little discipline can easy spend away savings with a weakness for travel, new cars, expensive clothes, or lavish gifts for grandchildren.  For this individual,  a QLAC purchase can impose discipline by simply making the assets out of reach.   Socking away up to 25% of your retirement assets now into an instrument that will begin paying fixed amounts during later years, can be a clever way of budgeting for future retirement income needs.  Ironically, this can allow one to be less concerned about the adequacy of savings early retirement years, safe in knowing that the income needs anticipated in later years have been addressed by the QLAC purchase.

6.       The Investment climate is uncertain.  The current stock market, bond market, and interest rate returns can have an important bearing on the decision to purchase a QLAC. If returns to investors are high, as they were during the 1990s, for example, then an IRA owner may be able to apply the 4% rule of thumb, selling off 4% of the IRA assets each year and applying the proceeds to living costs. If, on the other hand, the investment returns climate is more uncertain (as it has been in recent years), then that IRA owner may want to purchase a QLAC and lock in an annuity payment for the future. The QLAC will deliver a fixed return and remainder of assets in the IRA will still subject to market gains or losses.  The QLAC buyer has simply reduced his or her exposure to market fluctuations.

7.       I have a lower tolerance for risk.   Some people lay awake at night and worry when there is turbulence in the markets. For these folks, a QLAC may be a good way to assure future income and current rest. If, on the other hand,  someone is comfortable with fluctuations in the market, even those that affect a retirement nest egg, then that person may be more comfortable self-insuring against the probability of running out of money in retirement.

8.       I want to defer taxes.  A QLAC offers two potential tax advantages, which may or may not be of consequence to different IRA owners.  When the IRA withdrawal occurs to pay a QLAC premium, that distribution is not taxed.[6]  QLAC distributions are fully taxable when paid.  As a result, the QLAC buyer gets a 10 to 20-year deferral of taxation between premium payment and benefit receipt.  Further, in most instances, the IRA owner is in a higher tax bracket at the premium purchase date than he or she will be when the QLAC pays benefits.  Both tax deferral and lower tax rates can mean more spending money for the OLAC buyer. The second QLAC tax benefit is that the QLAC premium is not deemed part of IRA assets – even though there was no distribution deduction treatment.  The RMD is determined by dividing the IRA assets (after the QLAC premium withdrawal) by a fixed factor that IRS sets for each age.   With the IRA assets reduced by as much as 25%, the RMD after a QLAC purchase reduces proportionately. When this reduced RMD is sufficient to meet living expenses, the IRA plus the QLAC should produce enhanced future retirement income over the IRA alone alternative.  Every person’s facts and needs are different. (Click here to open a calculator that can show how this might work based on your facts.) There will be exceptions to any generalization. 

Want to learn more? Check out our videos page to see additional QLACguru videos.  See our calculators page to develop an anonymous RMD calculation and estimated QLAC quote. Answer specific questions by going to our Knowledge base page.  Visit our blogs page for in-depth articles on a variety of topics including how QLACs help with sequence Sequence Risk, how QLACs are similar to and different from Social Securitybest practices in buying a QLAC as well as many other topics. Free Consultation.  If you would like us to develop a free RMD analysis and illustration of how a QLAC might work for you, please click here.


[1] QLACs can be purchased using funds from other tax-qualified savings vehicles such as IRC Section 401(k), 403(b) and 457(b) accounts.  No “Roth” accounts are eligible for QLAC purchases.   Herein, when we use the term “IRA”, it is implied that the same conditions and terms apply to the other accounts.

[2] The maximum premiums are a function of the IRA (or IRAs) asset balances.  Collectively, the limit is 25% of IRA assets or if less, $125,000. 

[3] Married couples can be designed as joint beneficiaries at the policy owner’s election.

[4] IRC Section 401(k) accounts have some unique exceptions which can allow distributions to be deferred past age 72.

[5] At inception, a buyer can elect a QLAC policy form that returns a minimum of the premium invested to the policy owners’ estate.  That amount is reduced by any benefit distributions received by the QLAC owner.

[6] IRA distributions are treated as fully taxable.  This treatment is the flip side of the IRS permitting contributions to IRAs being tax deductible. Very rarely, there can have been non-deductible contributions to an IRA.  Distributions relative to these contributions require special treatment.



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