Question
I was curious if anyone has looked at longetivity annuities/QLACs? I'm trying to figure out if I should be looking at these, or if there are too many pitfalls.
Answers
It's an annuity that can be used to reduce your RMD. Of course, that's not the only idea. It's simply an investment vehicle to guarantee a lifetime of income.
I know there are some major downsides like dying before you start receiving the annuity, in which case, none of it goes to your estate. It all goes to the company from whom you purchased (unless I misunderstand). A number of financial advisers are stating it's a pretty good idea, for someone with substantial assets, to put some portion of their portfolio into one of these.
I need to be sure I understand all the risks — all the 'worst case' issues if I purchased one.
"....In 2014, the Internal Revenue Service (IRS) and the Department of Treasury revised rules regarding MRDs. These rules may provide you with greater flexibility for a portion of your pre-tax assets, allowing you to delay taking income payments until you may need them. A QLAC is a deferred income annuity that allows income to begin beyond age 70½ without conflicting with MRD rules. QLACs provide you with flexibility to defer the income start date until age 85 and can only be funded with assets from a Traditional IRA, or with assets from an eligible employer-sponsored qualified plan — 401(k), 403(b), and governmental 457(b). With a QLAC, you shift the risk of outliving your income to the insurer, who promises to pay you a certain amount of income for the rest of your life. The insurer also assumes your interest and market risk; even if the market and interest rates go down significantly during your deferral period, you still get the same guaranteed income stream...".
People commenting here don't seem to know about QLACs. You specify the start date for receiving income, it does not start at age 95. You actually cannot defer it past age 85. You can do single or joint life. Also surviver payments and and a Return of Premium death benefit less any payment that has been made to you.
https://www.immediateannuities.com/qlac-qualified-longevity-annuity-contract/
I won't repeat the basics you can get by googling "what is a QLAC." What I can tell you is to think of it exactly like an immediate annuity with payments starting at age 85 (rather than now).
You do not want to buy a QLAC or immediate annuity now because you get stuck with a very low interest rate. THE INSURANCE COMPANY WILL NOT TELL YOU THE RATE! (It would be very good for AARP to lobby for disclosure of the rate with the NAIC.) It is clearly and obviously taking advantage of seniors — those who buy these products — to not disclose the rate. The insurance companies will tell you how much to deposit and how much you will get as a payout. YOU need to calculate that compounded rate of return (you would think your financial advisor could do this, but most do not have the competence — ask your CPA).
If you die before age 85 or before you have recovered your initial deposit, you are guaranteed to get back whatever you invested (with 0% interest).
It occurs to me that an investor who has done well in stocks and wants to remain in stocks may be best suited for a QLAC (or a deferred longevity annuity). It allows the investor to take risk while knowing that they have a guaranteed income later in life (i.e, it is a good emotional tool)
You can also buy a QLAC with a total refund option on it where you don't lose your deposit. I ran some numbers at QlacQuote.com for a 64-year-old female starting income at age 85. Life only (No return of $) at age 85 $3,467/month vs. total refund at death $2,758. Loss of some income with the refund option, but they both give lifetime income.
It's a fixed annuity plain and simple. When used in an IRA, you don't need to take distributions from it until age 85 (rather than age 70.5). If you are a conservative investor, this may be fine for you as fixed annuities typically pay 1% more than long-term CDs at the bank. Currently, the yields on QLACs is 3-4%. You won't ever see that rate published — you need to know how to use a financial calculator. You cannot lose money (assuming the insurance company stays in business, which is a very good best given the low rate they pay you). For an investor who usually chooses mutual funds, QLACs will likely not be a rewarding investment.
I am sorry, but may I suggest that you check your sources. QLAC stands for Qualified Longivity Annuity Contract. It is a setup so that a portion of the seniors' long-term savings is NOT EXPOSED to the risks of the market's volatilities. How is that ever a BAD thing, when us seniors do not know when we may kick the bucket or required higher withdrawls? The whole goal of the QLAC is not about the returns but to deferr a portion (the lesser of the $130,000 or 1/4 of your retirement savings) to a later RMD (Required Minimum Distribution) age of 85 from 70.5. So for those who are able to plan out their usage, they can move their retirement to a GUARANTEED payment schedule and earning.
This move tends to take $ away from money managers who see it as a threat to their managed portfolios. In reality, it is a lower risk, as the payout is far more than your suggested 1%. The payment is based upon # of years in deferral, and your age. If a female, 64, choses to put away $125,000 until age 80, at the time she is 80, she will receive a little over $1700 per month for the rest of her life.... GUARANTEED, as stated on the contract per requirement from our government. It will not matter if the market goes up or down...
This was an important piece that the securities (401K) and mutual fund companies avoid... It helps seniors to put their retirements away in GUARANTEED CONTRACTS at a VERY REASONABLE RETURN so that their retirements are away from the volatilities of the market.... Think how you would feel when 2008 rolled around and suddenly over 1/3 of your retirement evaporated overnight. And it would take nearly 6 years for it to get back to where it was IF YOU DON'T TOUCH THE PRINCIPLE... imagine all the seniors who had to live off the principles at the time!!!!!!! They pretty much will never be able to get back to even!!!!!! I really get irritated when people skew the facts to make that extra commission.... I am in that business, but there is not need twist the facts.
Peace,
Steven Chao
QLAC is one of the best hedges against longivity and the volatility of the market. Remember, this is NOT all your retirement. It is most likely that some of your retirement are still invested in the growth sectors (through your multiple mutual funds).
Congratulations on that sale to the 64-year-old woman who is going to get a whopping $1,700 a month starting sixteen years from now. Did you tell her what that $1,700 will mean in actual dollars in the year 2034? Or did you tell her what her $125,000 would grow to — based on historical returns — if she put it all in VG Index500 and just forgot about it for 16 years?
No, market volatility and "longivity" are not the biggest threats to senior citizens. Inflation is the bigger threat. And the best protection against that is to develop a disciplined plan of investing in low-cost, no-load mutual funds with an emphasis on asset allocation (AA). Re-balancing when appropriate for aging.
There is good reason why annuities have always had a bad rep. Nothing has changed. Salesmen still trot out the gloom and doom talk of a bear market coming, other scare tactics. Hoping that the prospect is too feeble-minded to look up the published average annual returns of stock investing since 1926. Which is around 10%.
Let us take your suggestion with the lady that purchased QLAC (a version of Guaranteed Income Annuity). Since I am not a fortunate teller, I cannot look into the future. Hence, I have to use history as a point of reference (even though according to some, it is not likely to repeat).
So, my client purchased 125,000 worith of S&P 500 stocks around the first week of August 2000. Tossing out commission and dividents, she will receive 88.03 shares at $1420
| Year |
S&P 500 |
Value |
| 2000 |
1420 |
125000 |
| 2004 |
1064 |
93663.92 |
| 2008 |
1296 |
114086.9 |
| 2012 |
1391 |
122449.7 |
| 2016 |
2183 |
192169.5 |
| 2018 |
2820 |
248244.6 |
So as of today, if my client took your advice, she would have profited $123,103. Basically at a withdrawl rate of $1700 per month, that profit would have lasted her 6 years until it eats into her principle $125,000 (reglardless of the value of the $). Which is all good, until you realize that it took you 18 years to generate 6 years of income! You're right, I am using history to scare the readers. You're right history never repeats. You tell that to the seniors who worked at Walmart between 2000 and 2014 who could not retire because they could not withdraw from their principle retirement accounts that were tied to the market.
BTW, the average return on the S&P 500 between 2000 to today is around 5.48% (as you can see). However, in reality it is no better than the same account receiving a fixed annual 4.12%. You can see the evidence below;
| 2000 |
125000 |
| 2001 |
124999 |
| 2002 |
130148.9 |
| 2003 |
135511.1 |
| 2004 |
141094.1 |
| 2005 |
146907.2 |
| 2006 |
152959.8 |
| 2007 |
159261.7 |
| 2008 |
165823.3 |
| 2009 |
172655.2 |
| 2010 |
179768.6 |
| 2011 |
187175.1 |
| 2012 |
194886.7 |
| 2013 |
202916 |
| 2014 |
211276.1 |
| 2015 |
219980.7 |
| 2016 |
229043.9 |
| 2017 |
238480.5 |
| 2018 |
248305.9 |
Here is another thing... if you actually purchased a deferred income annuity back in 2000. You would have received a monthly income of well over $2,000 per month.
On the final assessment of your suggestion that inflation is the enemy: I don't disagree, but might I remind you, inflation, deflation, stagnation, hyper inflation, and a host of other possible economic issues may all be unknow risks that become problems. However, it is only a problem if the client lives that long. Therefore isn't the unknown in the story of longivity the issue at play here. I don't suggest people to avoid the growth in the market, but I would not paint a rosy picture either. You can do so with your money. More power to you. My client choses to use a portion of her $ to have a safety net. You clearly don't know people who had to work at Walmart.
If you can tell me when someone dies, when the payments end, then I can figure out the return of the QLAC. Its all about INCOME in retirement.
Example:
1. S&P500 fund $100,000 getting 8% annually would give you $215,893 in 10 years (4% income, $8,636/yr) Google "4% rule"
vs
2. QLAC $100,000 at age 61, Male income at age 71 would give you $13,356 income for life!
The QLAC gives you $4,720 MORE guaranteed income for life than the S&P 500 portfolio. You don't have to wait until age 85 to start income with a QLAC. Anytime from deposit to age 85 to start income.
-income rates at www.QLACQuote.com/get-quote
You can choose the "refund" option to allow your deposit to go to your name beneficiaries. By choosing this option, your income will be a little lower than the full "Life only" option. You can also add your spouse for the income payments which cut down the risk of losing the income.
