The New Pensions of Tomorrow

They say the good old day of solid strong Pension plans are over…or are they? It might be true that most companies are no longer offering one of the greatest benefits that helped attract and retain loyal employees known as pension plans. 

Not only can you still create an old fashioned pension like stream of income that you can't outlive, but through the use of a Qualified Longevity Annuity Contract or QLAC you can defer your RMDs to age 85 using a portion of your IRA or your 401(k). 

Who doesn’t want a pension? Consider these two approaches that a 65-year-old woman might take:

TRADITIONAL OPTION - Withdrawing 4 percent from a retirement account. Let’s say Mrs. Client has $450,000 in savings in her IRA: Beginning at age 65, she can spend about 4 percent of her nest egg annually, or $1,500 per month, and not worry too much that her money will run out, even if she lives another 30 years.

QLAC OPTION - The annuity option. If instead she spends $125,000 of her IRA savings on a Qualified Longevity Annuity Contract, or QLAC, then at age 85 she’ll have a guaranteed monthly income from that annuity of about $3,300, or nearly $40,000 a year. That monthly check will last for the rest of her life — even if she lives to be 120, as the oldest woman currently alive is 117 years of age. In the meantime, she can invest the remaining $325,000 of her retirement account more aggressively and spend it a little more freely because she can count on that future income.

Which would you choose — Option 1 or Option 2? Still undecided? 

A QLAC is a deferred annuity that you can buy in a tax-qualified plan such as a 401(k) or IRA; you pay a premium and 10 or more years to get a monthly payout. Similar to a pension, you know in advance what the projected payout will be at various ages.

Under current rules, you can move 25 percent of your account or $125,000 of your IRA (the lesser of the two) on a QLAC, generally in a lump sum.

Don’t think of buying an income annuity as an investment. Remember, investments allow for loss of funds. Instead, think of it as transferring the risk or insuring you don't allow your income to out live your life. A great feature is the longer you live, the longer the annuity pays out. 

Using a portion of your retirement account to buy a QLAC effectively reduces the amount you must take in required minimum distributions, or RMDs.

Reducing RMDs (download the RMD table here) is most appealing to retirees who don’t need the money and don’t agree with having to pay taxes on retirement funds that most end up putting into a taxable type account such as a savings or CD.

It’s important to recognize the significance of tax savings in your retirement years as RMDs many times push beneficiaries to a higher income level that triggers a higher Medicare premium.

For those that don't want to pace a large sum of their retirement into a QLAC, one strategy is to allocate funds in smaller increments on an annually. The retiree who lives off a combination of annuity income in addition to a percentage of their other savings can end up with more spendable income than someone who lives on either type of income alone. Many QLACs allow you to add a cost of living adjustment (COLA), so the annuity is indexed against inflation, protecting you against another retirement worry. 

QLACs also allow a spouse or someone else to be a joint annuitant, which means that the lifetime income guarantee covers both lives no matter how long either of you live. If you die before you start receiving payments or after you have begun receiving them, but before you have exhausted your initial contribution amount, you can choose to have the unused premiums refunded to your heirs.

Meaning should you pass before the payments begin, 100 percent of the initial premium will be returned to your listed beneficiaries in a lump sum. With that being said, what are your thoughts on placing IRA or 401K funds into a Qualified Longevity Annuity Contract?

PRESENT Financial Partners is a financial services firm committed to helping our clients improve their long-term financial success. Our customized programs are designed to grow, help protect and conserve our clients' wealth by delivering an unprecedented level of personalized service and expertise.

As a licensed broker we have access to offering plans from over 120 Insurance companies and carriers allowing us to offer the most suitable, TOP RATED and competitive products accommodating our clients' specific needs. We welcome you to contact us for any questions or to compare options and premiums. Should you be interested in offering your clients QLACs and joining PRESENT as an experienced licensed agent please visit our career site here. to learn more.