After retirement it is important to make your retirement funds last.

There is a new type of annuity called a Quality Longevity Annuity Contract, or QLAC (pronounced “cue-lack”). This type of annuity allows you to put away money now and save the payments for retirement. If you invest your money in a longevity annuity that meets the guidelines and is a designated QLAC you can delay receiving payments until you are 85! You can invest up to $125,000 or 25 percent (whichever is less) of your 401(k) or IRA account and reap the tax break.

The QLAC idea is to allow people to make (and have) more money in retirement without running out. This differs from putting up money for an immediate annuity because you don’t have to put up as much money.

Example

A 65 year old man invests $50,000 into an immediate annuity and could collect approximately $285 a month for the rest of his life. If he instead invests that money in a QLAC and waits to collect payments until he is 85, he can receive nearly $2,250 a month for the rest of his life. Check out the Annuity Calculator to find out where you’ll fit in!

Does it actually protect you?

Employee Benefit Research Institute economist Jack VanDerhei wanted to know if QLAC could actually cover living expenses throughout retirement and what the Retirement Readiness Rating of the subjects would look like. What he found was that those with the longest life expectancy (90-92) could grow their Retirement Readiness Rating by 2 to 9 percent by investing money in a QLAC. Today, the interest rates are low, but if they grow in the future, this will mean even higher payouts, possibly even doubled! Contrary to this though, VanDerhei found that overall (aside from the group with the longest life expectancy) the Retirement Readiness Rating by about 1 percent. This is because some people who invest in a QLAC will die before they collect a payout or soon after meaning they won’t receive their full amounts. VanDerhei compared it saying, “If you buy homeowners insurance and your house doesn’t burn down, that doesn’t mean you wasted the money you spent on the premium. You pad for and got insurance protection.” QLAC is like insurance  to protect yourself against running out of money in retirement.

Keep in Mind

If you decide to look into QLAC further get quotes from several different insurers. Another good idea is to buy into a QLAC gradually rather than investing all at once as interest rates are low currently. If you have no doubts you’ll be able to fund your own retirement, then the idea of a QLAC is probably not grabbing you. However, if you have any concerns about the nestegg you built depleting, then it can be wise to look into it. Talk to your financial adviser today!

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