QLACs: An Antidote to Today’s Retirement Challenges?
Life expectancy is about two decades longer now than it was 80 years ago. Not only that, the huge number of people who will be retiring in the next 20 years only heightens the consequences of increased longevity. Add to that major changes in the way retirees’ financial needs are met. Put together, that’s a recipe for a longer — and much more broad — need for retirement income.
One of the ways to better provide for those financial needs is the qualified longevity annuity contract (QLAC). In “QLACs, Practically Speaking,” the cover story of the Summer 2015 issue of Plan Consultant, Paul Kociuruba and John Ashford of Goldleaf Partners provide a discussion of the rules and operation of QLACs, and offer an assessment of their viability in the market.
A QLAC is an annuity purchased within a traditional retirement plan or with qualified money (e.g., an IRA), allowing the payments to be deferred until the person reaches a more advanced age. Kociuruba and Ashford suggest thinking of QLACs as “longevity insurance — basically a contract with an insurance company that pays a monthly income for life at an advanced age.”
They argue that QLACs offer many advantages; including:
- helping prevent having to draw down one’s money too soon;
- serving as a useful tax strategy;
- making it possible to do more with non-qualified assets before using the QLAC; and
- possibly enabling retirees to claim Social Security benefits at their normal retirement age.
They add, however, that while QLACs offer opportunity, they are not necessarily a panacea. Among the possible challenges:
- participation from younger people;
- cost in annuities from RMD calculation; and
- keeping up with the calculations (e.g., amounts and payouts).
Currently, Kociuruba and Ashford say, the firms issuing QLACs are only offering the product in the IRA market. This was not the original idea, they argue, noting that while this may be where QLACs’ benefit will be most prominent, the hopeful outcome for the regulation was for it to be introduced into group qualified plans — and therefore touch more individuals.
And this can be done, they argue. “Modifications necessary to include QLACs in qualified defined contribution plans can be absorbed and served through marketplace evolution; our industry adapts to change very well,” they write, adding, “All in all, we are in a good position to address this need once a product is developed.”