As you approach retirement, one of the biggest concerns may be outliving your savings. After all, the prospect of running out of money later in life when you’re less able to generate income is a significant source of stress for many. A Qualified Longevity Annuity Contract (QLAC) may help alleviate this worry by providing a guaranteed income stream throughout your later years.
What is a QLAC?
A QLAC is a specialized type of deferred income annuity (DIA) that may be purchased using funds from a qualified retirement account like a 401(k), 403(b), or traditional IRA. Its primary benefit is ensuring a reliable income stream even if you live a very long life. Think of it like longevity insurance.
How QLACs Work
Here’s how a QLAC typically works:
- Funding: You use some of your retirement savings to purchase a QLAC from an insurance company.
- Deferral Period: You choose an income start date, which may be as late as age 85. The longer the deferral period, the larger your future income payments will generally be.
- Guaranteed Income: Once the income start date arrives, you’ll receive regular payments for the rest of your life.
Benefits of QLACs
QLACs offer several advantages for retirement planning:
- Longevity Protection: The primary benefit is protecting against the risk of outliving your savings. With a QLAC, your income source is secured.
- RMD Reduction: QLACs are exempt from Required Minimum Distribution (RMD) rules until age 85. This may help reduce your taxable income and allow other assets in your retirement accounts to grow longer.
- Budgeting: Knowing you have a set amount of guaranteed income each month simplifies budgeting and provides peace of mind.
- Potential for Increased Payouts: Because QLAC payouts are based on life expectancy, if you live longer than average, you could receive more income than your initial investment.
Considerations Before Purchasing a QLAC
Like any financial product, QLACs have some points to consider:
- Lack of Liquidity: The money you put into a QLAC is generally locked up until you begin income payments.
- Inflation Risk: While QLACs offer guaranteed income, the payments are fixed. Over time, inflation could diminish their purchasing power.
- Opportunity Cost: Investing that same money in other ways might bring potentially higher returns, though there is also a risk of losing your principal.
Is a QLAC Right for You?
QLACs may be a good fit if:
- You’re concerned about outliving your savings and want guaranteed income.
- You want to minimize your RMDs in your 70s and early 80s.
- You have a portion of your retirement funds that you may allocate to long-term income.
Important Note: The maximum amount you may invest in a QLAC is $200,000 (increased from $135,000 in 2023). This helps ensure you maintain a diversified retirement portfolio.
The Bottom Line
QLACs may be a valuable addition to your retirement plan, providing a layer of financial security and peace of mind. If you want to generate guaranteed lifetime income, it’s definitely a strategy worth exploring. As with any financial decision, consult a financial advisor to determine if a QLAC aligns with your personal circumstances and retirement goals.
