Are you looking for an alternative or supplement to investing in a 401k? A Qualified Longevity Annuity Contracts (QLAC) can offer a different option for those looking for something to supplement their 401k and other retirement savings plans.
A Qualified Longevity Annuity Contract (QLAC) is an annuity contract (a financial product that pays out a steady stream of income over time) that is a specialized annuity specifically designed to help protect against the risk of running out of retirement funds.
QLACs provide individuals with income in their later years, typically after retirement age. They also can provide a steady stream of income for life, regardless of how long you live or the state of the markets.
How does a QLAC Differ from a 401k?
A 401k is a retirement savings account that allows individuals to contribute pre-tax money into an account. This money can be invested in the stock market and other investments and can be withdrawn after age 59.5. You can open a 401k when you start working and can begin contributing to it at any time. You may also be eligible for matching contributions from your employer.
However, 401k savings can be subject to market volatility and may not last long enough to cover one’s retirement expenses, especially if the individual lives for a long time.
Qualified Longevity Annuity Contracts (QLACs) provide individuals with a way to supplement their 401k and other retirement savings plans by offering a steadier stream of income after retirement age. This is because Qualified Longevity Annuities are backed by the insurance company that issued them, so there is less risk of loss due to market volatility.
Qualified Longevity Annuity Contracts differ from a 401k because money invested in a QLAC cannot be withdrawn before retirement.
Individuals between the ages of 40 and 75 can open a Qualified Longevity Annuity Contract. It is important to note, however, that the earlier you open a Qualified Longevity Annuity, the longer you will receive income from the contract; Qualified Longevity Annuity should increase in value the longer you wait to start collecting income from them.
Qualified Longevity Annuities can also provide an inflation-adjusted income stream, meaning that the payments can increase over time to keep up with the inflation rate. Qualified Longevity Annuity Contracts are not meant to be used as an investment vehicle; the payments you receive from a QLAC are guaranteed, and you can use that money to pay for your retirement expenses.
The amount of money you put into a Qualified Longevity Annuity Contract is the same amount you will receive in retirement. Qualified Longevity Annuities do not offer the same potential for growth that a 401k or other investment account may provide; however, they do provide a steadier income stream that is not as affected by market changes or declines.
The 401k plan allows you to save for retirement without paying taxes on your income. However, when you retire, the money is available as a lump sum that may be invested in any number of investments, including stocks, bonds, mutual funds, or other assets.
By contrast, QLACs provide regular payments over time instead of one-time lump sums. However, you are able to draw out more money from the QLAC if needed.
How does a Qualified Longevity Annuity Contract Work?
After purchasing a QLAC, individuals designate a specific dollar amount to be invested in the annuity contract. Funds are then held within that contract until retirement age, at which point the purchaser begins receiving payments for life. These payments typically start later than other forms of retirement income, thus providing extra protection against outliving your savings.
Most Qualified Longevity Annuities can accept funds from a 401k. Investors can roll over up to 25 percent of their 401k balance into a Qualified Longevity Annuity Contract, up to a maximum of $130,000.
The QLAC Process
The process of purchasing a Qualified Longevity Annuity Contract is relatively simple.
First, the purchaser must meet specific requirements such as being at least age 64 and below age 85, having at least $100,000 in qualified retirement accounts, and having the funds available to purchase the annuity. Qualified retirement accounts may include funds from IRAs, 401ks, 403bs, and other accounts.
Second, the purchaser needs to decide how much of the qualified retirement savings will be used to purchase the Qualified Longevity Annuity Contract. Generally, it is recommended to use 15-25% of the funds available, depending on the individual’s retirement goals.
Third, it is essential to compare different annuity contracts before making a decision, as annuities can come with various features and benefits. (*Qualified Financial Planners at Iron Point Financial are available to help individuals compare Qualified Longevity Annuity Contracts- give us a call today!)
Qualified Longevity Annuity Contracts are an ideal way to boost and supplement the money flow from other retirement savings accounts. This includes Social Security and other sources of retirement income, such as rental properties or pension plans.
Who should consider buying a Qualified Longevity Annuity Contract?
QLACs are designed for individuals who want help ensuring they will have income during retirement, regardless of how long they live or the state of the markets. Qualified Longevity Annuity Contracts are best suited for individuals who have already maxed out their 401k or IRA contributions and want additional protection against longevity risk.
Benefits of Qualified Longevity Annuity Contracts
QLACs provide a more reliant stream of income, regardless of how long you live or the state of the markets. This type of annuity contract also allows individuals to defer their taxes until later in life and offers an additional layer of protection against longevity risk.
Other benefits include:
- Tax deferral – Qualified Longevity Annuity Contracts allow you to delay taking taxes on the money invested until payments begin.
- Flexibility – Qualified Longevity Annuity Contracts can offer flexible payout options, allowing you to select the payment plan that best fits your situation.
- Security – Qualified Longevity Annuity Contracts can provide a steady income stream, regardless of how long you live or the state of the markets.
Drawbacks of Qualified Longevity Annuity Contracts
There are a few drawbacks to purchasing Qualified Longevity Annuity Contracts:
- Early termination fees – Qualified Longevity Annuity Contracts are long-term investments. Most annuities come with an early termination fee should the investor withdraws their funds before the term ends.
- Lack of liquidity – Qualified Longevity Annuity Contracts are not as liquid as other investments, so investors should carefully consider their need for access to the funds before investing.
- High Fees – Qualified Longevity Annuity Contracts typically have higher fees than other investments, which could adversely affect potential returns.
- Market risk – Qualified Longevity Annuity Contracts are not immune to market volatility, and the value of your annuity can decrease if the market value of the underlying assets decreases.
- Inflation risk – Qualified Longevity Annuity Contracts may not keep up with inflation, meaning the payments you receive may be worth less over time.
- Opportunity cost – Qualified Longevity Annuity Contracts limit your options for other investments as the money you invest in an annuity cannot be used for other investments.
The Process for Purchasing QLACs
The process for purchasing a Qualified Longevity Annuity Contract starts with evaluating your financial situation and goals. Once those have been established, it’s essential to work with an experienced financial advisor to determine which type of annuity contract best suits your needs. After that, you’ll complete the necessary paperwork and make an initial deposit into the annuity contract.
At Iron Point Financial, we understand that no two people have the same financial needs or goals. That’s why our experienced advisors are here to help you create a customized plan to meet your specific needs.
Our financial advisors can help you understand Qualified Longevity Annuity Contracts and how they work so that you can decide whether it’s a good fit for your retirement savings plan.
We invite you to call us today or schedule an appointment through our website if you want or need help in your current financial situation or want help planning for the future. We look forward to helping you pursue your financial goals!
Disclosure:
The guarantee of the annuity is backed by the claims paying ability of the issuing insurance company.
