Q. I’m 55 and have been approached by my financial adviser to purchase something called a Qualified Longevity Annuity Contract within my rollover IRA. She says that the government is actually endorsing these as a tool baby boomers can use to protect them from running out of money and that everyone should buy one. She also says that by investing in one of these I can reduce the amount I will be required to take out once I turn 70 1/2.
She knows I dislike annuities and prefer the flexibility of a balanced portfolio but she says this is a different type and I can even have a guarantee that my heirs will get any money I put into the annuity if I die before receiving a benefit equal to my investment.
Can you explain these, is the government promoting these and do you recommend them?
A. I guess you could interpret the fairly recent Treasury Regulation concerning a Qualified Longevity Annuity Contract as a government endorsement but that doesn’t mean they are appropriate in all circumstances or that everyone should buy one.
First, a definition of a longevity annuity. A longevity annuity is an annuity that is purchased now with a lump sum of money with the guarantee of a future income stream. If you want to purchase this type of annuity within a retirement account, it makes sense for it to be a QLAC.
To be a QLAC, the longevity annuity must meet the following requirements: Only 25 percent of any employment retirement plan or 25 percent of all pre-tax IRAs can be invested and the amount may not exceed $125,000; payments must begin by age 85 and they must be fixed (cost-of-living adjustments are allowed); no cash surrender value is allowed but it can have a return-of-premium death benefit payable to heirs.
A QLAC is excluded when calculating required minimum distributions.
These requirements apply to individuals so, if married and each spouse has their own retirement plan or IRA, each could purchase a QLAC up to the lesser of 25 percent of their account values or $125,000.
Now that you know what they are, should you buy one? To help answer this, I’m going to use some numbers from Cannex, a firm that compiles data and calculations about a variety of financial products and makes the information available to financial service providers.
These numbers, as of July 8, 2014, were found on an informative blog, https://www.kitces.com/blog, addressing QLACs.
A 55-year-old couple who invest $100,000 in a QLAC will stipulate that payments of $4,054.10/month will begin at age 85 and continue as long as either remains alive.
If they die anytime between age 55 and 85, the $100,000 is lost.
If the couple include a return-of-premium death benefit, if the original $100,000 is not distributed before they die, a beneficiary would receive any remaining payout up to the original $100,000.
This option would decrease the monthly annuity payment to $3,690.30.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624