What retirees should be asking about QLACs
Qualified Longevity Annuity Contracts (QLACs) were approved by the Department of Labor and the IRS on July 2, 2014, and the misinformation along with some of the misunderstandings of the product has been surprising. However, in the murky world of annuity sales and promotion, these mixed messages are almost predictable.
Recently, fellow RetireMentor and all-around smart guy Michael Kitces published a blog post for his advisor subscribed following about some of the negative features of QLACs. Annuity haters across the fruited plain rejoiced that Kitces seemed to be throwing QLACs (read: annuities) under the bus, but he also made the case for the transfer of risk benefits of mortality credits that QLACs provide.
The QLAC glass was half-full for some, and definitely half empty for the haters. For me, Kitces’ contrasting hypothetical market-return scenarios with QLAC contractual guarantees was a great example of what I call “comparing investment apples to annuity oranges.” In my opinion, QLAC contractual guarantees (read: annuities) and investments are two different animals.
As a self-proclaimed official translator for the resident “annuity intellectuals” (Michael Kitces, Moshe Milevsky, Wade Pfau, etc.), let me strip away all of the in-depth analysis and charts to provide you the basic QLAC questions you need to answer to make an informed decision. Yes, I speak fluent annuity.
Do you need guaranteed income starting at a future date?
If you don’t need income in the future using your IRA assets, then you don’t need a QLAC. However, if you think that down the road you will need income for you (and your spouse if applicable), then a QLAC might be a good solution for your IRA money.
Do you want to potentially lessen your Required Minimum Distribution (RMD) taxes?
If you are thinking that QLACs will significantly lessen the taxes on your RMDs, you will be sorely disappointed. There are some potential savings, but this should not be your primary decision to buy a QLAC. QLACs should be primarily purchased for future income guarantees.
Do you want to relinquish control over the QLAC asset?
When you buy a QLAC, the only way to get your money back is through payments or to die. By the way, dying is not a good strategy.
Do you want to set up a pension payment for your spouse?
Most of my clients who have purchased QLACs like the fact that their spouse could be added to the policy for a joint lifetime income guarantee, even though the asset used is a traditional IRA.
The only way to efficiently address inflation using annuities is to have guaranteed income streams starting at future dates. QLACs allow you to do that by laddering or staggering the income start dates by using multiple policies within the premium limit rules.
Do you want a non-investment in your IRA?
QLACs are not investments. They are not classified as a security. They are income insurance, pure and simple. In my opinion, it is a colossal waste of time to compare QLACs to non-annuity investments, or run return on investment (ROI) comparison-type calculations. You are buying a future income stream with a QLAC. That’s it. There’s no ROI until you die.
Do you want an income stream that you cannot outlive?
Social Security is a lifetime income stream. Your company pension (if so fortunate) is a lifetime income stream. QLACs fit in that same longevity risk solution category. If you do not need another lifetime income stream, then you do not need a QLAC.
I’m sure that you have heard of a “horse whisperer.” I consider myself the “annuity whisperer.” There shouldn’t be a need for someone to translate these unique transfer of risk products, but people seem to over analyze most things. Annuities are definitely one of those overanalyzed strategies.
I am proud to say that I’m the only person who has published a book on the QLAC subject called the QLAC Owner’s Manual, and clearly understand the benefit propositions and limitations of the product. QLACs are future pension products that provide a lifetime guarantee, and can be used with Traditional IRA money. They also can potentially lower your RMD taxes. Those are the main value propositions of a QLAC.
As the late Yogi Bera once said “If the world were perfect, it wouldn’t be.”
QLACs aren’t perfect either, but they do have their place in some IRAs for future income needs. Rest in peace Yogi.
Originally published 9.29.15 by MarketWatch.com – http://www.marketwatch.com/story/what-retirees-should-be-asking-about-qlacs-2015-09-29