Today’s longer lifespans have some investors wondering whether they will outlive their retirement savings. According to a 2013 Stanford Study on Longevity, there is now a 50% chance that a 65 year old man will live to age 85 and a woman to age 88. Critical expenses, such as prescriptions, in-home-care and other health care expenses will also increase as we age.
In 2014, the IRS revised rules regarding Required Minimum Distributions (RMDs). This provides investors added flexibility for a portion of pre-tax retirement assets. The new rules allow for delaying taking some income payments until they are needed.
So, how do you create future lifetime income after age 70½? An annuity called a Qualified Longevity Annuity Contract (QLAC) is a deferred income annuity that allows the start date for taking income until age 85. QLACs can be funded with assets from traditional IRAs or eligible employer and government qualified plans. Note, though, that QLACs cannot be purchased using Roth or inherited IRA dollars. And only a limited amount of money can be used to buy a QLAC. Either up to 25% of the value of all your retirement assets or up to $125,000, whichever is less.
Who Might Benefit from a QLAC?
- Investors approaching RMD age (70½) or those currently taking RMDs.
- Investors that have existing income that will last for a number of years and do not currently need all of their RMDs for income.
- Investors that want the flexibility to start additional income between ages 70½ and 85.
Who Should Not Buy a QLAC?
- Anyone who doesn’t expect to live much past the age of 85. You can determine how long you are likely to live by using the life-expectancy calculator available at SSA.gov. (If you die before age 85, your heirs get nothing from QLAC unless you purchased a “return-of-premium” death benefit guarantee).
- Investors with assets that provide sufficient money to live on no matter how long they live.
- Anyone whose assets total so little that they are likely to run out before age 85. A QLAC would not make sense because that money will be needed to live on.
A Certified Financial Planner will be well versed on the benefits, costs and strategies of QLACs. Be sure to do the research due diligence, including talking to your financial planner.