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SUPPOSE YOU RETIRED at age 65 and you knew it would all be over at 85. That would make generating retirement income relatively easy: You might spend 1/20th of your savings in year one, 1/19th in year two and so on. Problem is, there’s a decent chance you will live beyond 85. That is where longevity insurance can help.
Longevity insurance, also called a deferred income annuity, is essentially an annuity that pays lifetime income starting at some future date. Because there’s no guarantee that you will live that long, let alone collect a lot of income if you do, this has the potential to be a relatively low-cost way of dealing with longevity risk.
For every $100 you invest in a deferred income annuity at age 65, you might receive around $30 a year of income starting at age 85. For a precise quote, go to sites such as BlueprintIncome, Fidelity Investments, ImmediateAnnuities and Income Solutions. You could use perhaps 15% of your savings to purchase longevity insurance that kicks in once you turn age 85. Meanwhile, you might spend down the other 85% of your savings between now and age 85 using the strategy described in the first paragraph.
You can buy pure longevity insurance that pays only if you live to the specified age. But many folks, fearful they will die without getting any money back from their insurance purchase, opt for various guarantees. These guarantees carry a cost, which is paid in the form of lower future income.
What if you plan to buy longevity insurance using money that’s in a traditional IRA or 401(k)? Look for deferred income annuities that are so-called QLACs, or qualified longevity annuity contracts. Why? Ordinarily, you’re required to start taking minimum distributions from a traditional IRA or 401(k) once you turn age 73. But if you move some of that money into a QLAC, those taxable distributions are delayed until the QLAC starts paying you income—though the income must start no later than age 85. In 2023 and 2024, you can’t stash more than $200,000 of your qualified retirement accounts in a QLAC.
Don’t like the idea of longevity insurance? You could designate 15% or 20% of your portfolio for the post-age 85 period. If you live that long and you’re in good health, you might at that juncture use this money to buy an immediate fixed annuity. If your health isn’t so good, you could simply spend down your remaining savings. What if you don’t live until age 85? The money could make a handsome inheritance.
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I have a 25-year TIPS liability-matching portfolio and would like to add a deferred annuity to better manage longevity risk. I visited https://www.fidelity.com/annuities/overview, but the number of choices is overwhelming. How did you determine the best annuity for your needs?
It depends what goal you’re looking to accomplish. If I were to buy longevity insurance — which I don’t currently plan to do — I’d view it as insurance in the event of a long life, and buy an income stream starting at age 85 and skip all the guarantees (refund to heirs, etc.) because I’d want pure longevity insurance.
I just wanted to add that the 7/24/2023 article in the Wall Street Journal on the 2023 increased maximum contribution of 200K to a QLAC notes that since the remaining IRA will be smaller, the RMD will be smaller. May be obvious.
I called NY Life. The QLAC income does not count as RMD. So the remaining IRA is standalone regarding the RMD it will be taking.
Thank you!
Question: Does the income from a QLAC once you start taking it count towards the RMD for the IRA you used to fund it? I have found conflicting information on this question on-line. Specifically I read that maybe Secure 2.0 changed the rules for this and other qualified annuities.
Thanks for the question. James McGlynn was kind enough to answer — see above.