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?
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 Security, best 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
 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!