QLACs Could Be the Next Big Thing

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With the possibility of a quarter-century or more of retirement, many Americans fear they may outlive their money. There’s a 43% chance that one member of an upper-middle-class couple, both currently age 65, will live to be 95.

For some, longevity annuities may be a good tool to guarantee a continuing income late in life. They became more attractive last year when the government okayed their use for IRAs and 401(k) plans as qualified longevity annuity contracts, or QLACs.

They will become the most popular annuity strategy within the next five years, predicts Stan Haithcock, a Ponte Vedra Beach, Fla.-based annuities consultant.

“The annuity consumer is going to start demanding simplistic and transparent solutions, and turn away from the high-commission and overhyped variable and indexed annuities,” says Haithcock, who also goes by the trademarked moniker “Stan the Annuity Man.”

With QLACs being offered in select retirement plans, consumers will become comfortable with them, he says. “The same wave of consumer popularity happened with the inclusion of mutual funds within 401(k)s,” says Haithcock.


A QLAC is a deferred-income fixed annuity into which individuals can move 25% of their qualified retirement savings accounts, up to a maximum of $125,000. Instead of receiving immediate payouts, individuals can defer them – and the required minimum distributions on the amount in the annuity – until they are 85, offering tax savings and a guaranteed revenue stream.

The longer the individual waits to start taking the money out, the more it grows – and the growth is free of risk and guaranteed. For a typical retiree, putting just 10% to 15% percent of assets into a longevity annuity can create spending benefits that match the allocation to an immediate annuity of 60% or more, says Jason Scott, managing director of the Retiree Research Center at Financial Engines, an independent investment advisor.

Advisors need to be able to help clients figure out how much of an annuity to buy, says Scott.

“You want to avoid having big changes in lifestyle required at age 85,” he says. “So you don’t want to have a financial plan that has you living on $50,000 a year until you’re 85 and then $150,000 when you’re over 85. Then you overbought the annuity – and you obviously don’t want the opposite, underbuying the annuity, either.”

But longevity annuities make that calculation much easier, he says. “You don’t have to figure out how to make your money last an unknown amount of time,” says Scott, who adds that longevity annuities, by their very nature, don’t require retirees to go all in. “You can take a little bit of your money and buy that insurance,” he says.

Longevity annuities are not likely to be a good choice for clients who cannot afford to take deferred payments or who are in failing health.

On the other hand, many advisors see it as a good alternative for clients, especially older ones, who cannot afford or get long-term care insurance. With their guaranteed income stream, longevity annuities can also help take the pressure off a portfolio and protect retirees against bad sequences of market returns, says Johnna Chewning, vice president of fixed annuity sales at Raymond James.

But those are not the reasons that clients are interested in longevity annuities right now, Chewning says: “It’s all the 70 1/2-year-olds – probably less than one percent of our shop – who have boatloads of money and don’t need their RMDs to live on and who want to avoid taxes.”

Sales are “very nominal” right now, she says. “The industry thinks that this is going to explode, and I believe that we will see a lot more planning around these policies, whether they’re QLACs or plain DIAs [deferred income annuities],” she says. “It’s going to be huge because it’s going to become mainstream for people to think it’s better for me to have some pension check along with some investments than a big pot of money that I hope doesn’t crash and burn right around the time I retire.”

Paul Hechinger is a New York-based freelance writer.

This article was originally published on Financial-Planning.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Personal Finance , Wealth Management , Retirement

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