By Dave Anderegg, CRPC®, CFP®
You may have heard that very soon, PCA Retirement & Benefits (RBI) will be offering a ‘lifetime income’ solution in the PCA Retirement Plan. This new and innovative type of longevity annuity is known as a ‘Qualified Longevity Annuity Contract’ (QLAC). A QLAC is designed to be purchased early in your retirement years (mid-to-late 60’s or 70’s), and then provide income for life for both you and your spouse beginning at an advanced age like 80 or 85. Converting only a fraction of your retirement assets into guaranteed income for life will prevent you from outliving your savings.
Since the prospect of going back to work at 90 is somewhat daunting, the benefit of eliminating the risk of running out of savings cannot be overstated. But there are also added benefits to owning a QLAC that go beyond simply insuring your savings. This article focuses on these lesser known benefits.
One of the most significant benefits is simplification. Most of us don’t know how long we (or our spouse) will live. And that unknown creates a sizable retirement planning problem. How much should you spend each year? The answer is: It depends. If you knew that you or your spouse would live until age 105, you would certainly draw down your savings more slowly than if you knew we were going to live until age 87. Having an unknown planning horizon means that you must inevitably spend less each year than you could if you knew how long your savings would be needed. For this reason, researchers recommend not withdrawing more than 3.5 – 4% of your balance annually. This exacerbates the pain for those who already find themselves in the position of having not saved enough.
But QLACs solve this problem by providing a known planning horizon. Unless leaving an inheritance from your retirement account is a priority, your remaining savings need only last until your annuity begins (e.g. age 85). For instance, a 70-year-old couple with a $300,000 remaining balance, could simply withdraw 1/15th or $20,000 each year until age 85. While we might recommend a slightly different method in practice, this illustrates the point. A known planning horizon greatly simplifies the use and management of your remaining assets.
Some have said retirement can be divided into 3 stages: the ‘Go-Go’ stage, the ‘Slow-Go’ stage, and the ‘No-Go’ stage. Clearly retirees travel more and are more active in these early stages. Having a ‘known’ planning horizon could also facilitate the ability to withdraw more and increase your annual income in these early stages of retirement. Consider the following example. Drawing down his account at 4% per year to avoid running out of savings, a cautious 70-year-old retiree with a $400,000 balance might begin by withdrawing only $16,000 per year. If instead, he purchased a $100,000 longevity annuity, his remaining balance of $300,000 could provide approximately $21,000 per year and he would most likely still have a few dollars remaining in his account when his annuity income begins at age 85. The potential for more income early in retirement is a collateral benefit.
Advanced-life guaranteed income can also be beneficial if you experience catastrophic healthcare or prolonged long-term care costs. Providing adequate healthcare for those we love can deplete retirement savings and leave the surviving spouse with little or no income. Just the fear of depleting your savings could alter your decisions about what level of care to provide. But longevity annuity income, which can be used to help pay for healthcare costs, is designed to continue to provide helpful income to surviving spouses long after other savings are exhausted. And because it’s income, and not an asset that can be depleted, it could speed up eligibility for additional government healthcare assistance (like Medicaid) if necessary.
Because of certain IRS rules, QLACs also have the potential to provide tax savings. Since QLACs are exempt from Required Minimum Distribution (RMD) rules, purchasing a QLAC reduces your account balance, and thus reduces the amount you’re required to withdraw annually (RMDs are calculated on your remaining account balance). Those with more than enough income could withdraw less from their account each year and report less taxable income.
And finally, consider the benefit of lifetime income for those who will experience some form or cognitive decline. Longevity annuity income cannot be cashed out or exchanged and requires no management or investment skill or knowledge. It cannot be lost as a result of bad financial decisions resulting from cognitive impairment. Moreover, it is easily inherited by surviving spouses and protected from dishonest financial advisors, unscrupulous product salesmen, and others seeking to defraud those struggling with cognitive issues.
In conclusion, longevity annuities help investors hedge their greatest retirement risk (longevity risk) by providing income that cannot be outlived. Guaranteed income later in retirement may be the most critical ingredient of a successful outcome. But the added benefits that result from QLAC ownership are significant as well.
Geneva Benefits Group serves those who serve others, providing practical support for the financial, physical, and mental wellbeing of people who work in full-time ministry.