When Should You Begin Collecting QLAC Income?

Choosing a start date for QLAC income payments depends on your current age, health and  financial situation. The longer you defer the start date, the higher your payments will be.

To a certain extent, choosing an income start date depends on how many years you can live on the rest of your savings, and how long you think you’re going to live in general. If you’re 65 and in poor health, you probably don’t want to wait until age 85 to start receiving income payments—and you may not be a good candidate for this sort of annuity at all.

“If the probabilities are that you have a longer than average life expectancy, [QLACs] can be a windfall,” says Artie Green, a CFP in Los Altos, Calif. “But if you have a shorter than expected longevity, of course, that works against you with any annuitization.”

Depending on your QLAC provider, you may be able to change the date your payments will start, but only before you’ve received any payments.

“Once you start annuitizing or receiving income, you can’t change [the date] with any one of the products that I know of,” Kaye says. Make sure you understand whether a date change is possible before you purchase a QLAC product.

How a QLAC Can Reduce Your Taxes

A QLAC reduces an investor’s tax burden by protecting a portion of retirement account money from RMD calculations, resulting in smaller required distributions and potentially lower income tax liabilities.

Since they are purchased with pre-tax retirement savings, once you receive income from a QLAC, the distributions are taxable at your current marginal ordinary income tax rate.

What Is a QLAC Cash Refund Death Benefit?

When purchasing a QLAC, you have the option of choosing a plan whose payments stop when you die, a plan whose payments stop when you and your spouse die (called a joint life QLAC), or a plan that will pay a refund upon your death. In that last case, if there’s any difference between the premium you paid for the plan and the sum of all payments made from the plan, it will be refunded to a named beneficiary.

Choosing a refund death benefit or joint life QLAC will lower the annual dollar value of QLAC payments you receive.

Why Choose a QLAC?

A QLAC has several advantages for retirees:

1. Long-term income security. If you’re worried that your retirement savings might not last for the long haul, a QLAC can offer some peace of mind. QLACs provide guaranteed income later in retirement and can act as hedges against long-term care costs later in life.

2. RMD deferral. If you’re looking to minimize how much money you’re required to draw from your retirement accounts, a QLAC allows you to delay distributions on a portion of your savings up until you turn 85.

3. Principal protection. A QLAC locks in future payments, protecting your retirement money from market dips later in life. But unless you purchase an inflation rider, which will lower the initial amounts you receive from an annuity, your monthly payment may lose value over time.

1. Income for your spouse. If you set up a QLAC as a joint annuity, it will continue paying income as long as you or your spouse is still living. That said, joint annuities tend to offer lower payments due to this benefit.

How to Manage QLAC Risks

QLACs aren’t free of downsides. Some retirement experts aren’t big fans of QLACs because investors are locking in growth at a low fixed rate, giving up the chance of higher growth using other means.

“The future growth difference between money invested with a prudent investment mix and the fixed rate [offered by the annuity] can leave the QLAC investor with less money over the long run,” says Neal Nolan, a CFP in Asheville, NC.

One way to manage this risk is to “ladder” QLACs by purchasing a series of smaller QLACs over several years, assuming rates might increase in the future.

“Laddering is also beneficial in that the older you are when you buy one, the bigger the payout,” Green says. “For example, buying a QLAC at age 65 to start paying at age 75 will have a smaller payout than buying one at age 66 to start at age 76, even if interest rates do not change over that time.”

As with any financial product that promises payouts far into the future, the financial strength of the issuing company is also a concern. Unlike banking products, annuities are not guaranteed by the Federal Deposit Insurance Corporation (FDIC).

While QLAC providers insure their products, it’s still possible for insurance to fall short. That’s why it’s important to pay attention to the financial ratings of the insurer you’re purchasing the QLAC from. You might also consider purchasing QLACs from more than one firm to spread out the risk.

“A third alternative is to buy only from a company that is a member of the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA),” Green says. “It’s like insurance for insurers and will cover some amount of the annuity payout if your insurer goes bankrupt.”

The Bottom Line on QLACs

QLACs can be a helpful addition to your retirement plan if you’re worried about outliving your nest egg and if you like the idea of counting on a guaranteed income stream later in life. But the product isn’t right for everyone. For more information on QLACs and whether they’re appropriate for your retirement plan, consult a financial advisor.

Source: https://www.forbes.com/advisor/retirement/what-is-qualified-longevity-annuity-contract-qlac/