Social Security was not designed to be the sole source of income for retirees, and today Social Security represents about 38 percent of a typical retiree’s income.1
But Americans are living longer nowadays, and their longevity often erodes their other sources of income, making it tougher for retirees to make ends meet as they age. This challenge increases seniors’ risk of running out of income in retirement and contributes to retirees becoming dependent upon Social Security as their main source of income.
With more than 10,000 baby boomers retiring daily, this issue must be addressed. As government economic experts dug deep to find possible solutions to this financial challenge, they came to a conclusion that many others reached long ago: Insurance companies can play an important role in the financial challenges associated with longevity.
In a recent press release2, the U.S. Treasury recognized deferred income annuities as an important option to protect against longevity risks.
“As boomers approach retirement and life expectancies increase, income annuities can be an important planning tool for a secure retirement,” said J. Mark Iwry, Senior Adviser to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy. “All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings.”3
In their ongoing effort to increase retirement income options, the Treasury is now giving special tax status to certain longevity annuities they call QLACs. These recent regulations expand the availability of longevity annuities — which have existed for many years — and make them accessible to the 401(k) and IRA markets. While there are some restrictions as to how QLACs can be used, the goal is to provide people with a tool that can help protect them from outliving their retirement nest egg.
So what exactly is a QLAC? The term “qualified longevity annuity contract” is being used to describe this new class of annuities that are given special status. The money in a QLAC is not subject to the normal required minimum distributions (RMDs) that typically kick in at age 70 1/2. In fact, distributions from a QLAC can be delayed to start as far out as age 85.4
The Treasury and IRS concluded that there were advantages to modifying the minimum distribution rules. These new regulations require that in order to be considered a QLAC, the longevity contract must specify a date by which distributions will start. Under the final rules, it was decided that the start date of the distributions could be no later than the first day of the month following your 85th birthday.
The regulations also make clear that participants in a 401(k) or similar plan, or an IRA, are able to use as much as 25 percent of their account balance to purchase a longevity annuity. The 25 percent has a cap that was originally set at $100,000 but was increased to $125,000 in the final rules. Under the new regulation the purchase of a longevity annuity can now be made without being required to comply with the age 70 1/2 RMD requirements.
An ROP (return of premium) option was also included in the final regulations. This change will likely appeal to those concerned that they may die before receiving distributions from the QLAC. This option may be structured to ensure the distribution will at least equal the purchase payment. There is a cost to add an ROP feature which will result in lower payments during distribution, but that cost is estimated to be relatively small.
If you have a 401(k) or other employer-sponsored individual account plan or an IRA, talk with your professional advisers to see if a qualified longevity annuity contract makes sense for you.
While knowing exactly how long we will live is unclear to most of us, what is clear is that as a whole we are living longer. What is also clear is that the Treasury, IRS, and others are recognizing that the income for life provided by annuities can play an important role in protecting against the risk of outliving your money.
Learn more about contractually guaranteed income in Crown Atlantic’s new free report “The Annuity Primer: Get Guaranteed Income for Life.” Go online to CrownAtlantic.com/Protect or call toll free today 855-221-5546.
Joe Stark is the CEO of Crown Atlantic Insurance, LLC in Boca Raton, Fla. Stark is an insurance industry veteran with more than 25 years of experience. For more of his reports, Go Here Now.
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