When it comes to retirement income planning, it isn’t only your high-net-worth clients with complex portfolios who need help—middle market clients also require assistance, and these clients are often looking for simplicity in planning.
Recent studies show that, with the emergence of qualified longevity annuity contracts (QLACs), longevity annuities can play an important role in achieving this goal. As these relatively new products become more integrated into the mainstream retirement planning industry, this role in ensuring sufficient retirement income is likely to grow considerably—and, when paired with a smart early retirement investment strategy, their potential usefulness among middle market clients is undeniable.
The Future of QLACs for Middle Market Clients
Longevity annuities can play an increasingly important role in middle market clients’ retirement income planning as major carriers begin to offer QLACs and more clients become aware of their usefulness. Importantly, studies show that QLACs can be paired with an outcome-based investment strategy during the early years of retirement in order to provide for retirement income during all phases of retirement.
This strategy would involve combining strategic withdrawals from a traditional investment account during the early years of retirement with a longevity annuity that guarantees retirement income later in retirement (around the time that the client reaches his or her 80s). The QLAC would ensure that the client would not outlive his or her retirement savings regardless of increasing lifespans.
The appeal of this strategy is in its simplicity. The investment account would offer a diversified group of investment options for the client’s early years of retirement, and the QLAC would eliminate the responsibility for investing a portion of the client’s retirement assets later in life, when many clients reach an age where they may no longer want the responsibility of managing a large pool of assets. The QLAC allows the client to abdicate some of his or her investment responsibility without fear of running out of money late in life.
For many clients, the biggest objections to purchasing a QLAC are the loss of control over a chunk of retirement assets and the inflation risk that such a product can present. By pairing the QLAC with investments that will be strategically drawn down early in retirement, some of these concerns can be mitigated.
A QLAC is an annuity contract that is purchased within a traditional retirement plan (whether it’s a 401(k), 403(b) or traditional IRA), under which the annuity payments are deferred until the client reaches old age in order to provide retirement income security late in life. Payments must begin by the month following the month in which the client reaches age 85.
The value of the QLAC is excluded from the retirement account value when calculating the client’s required minimum distributions (RMDs) once the client reaches age 70½, though the client is limited to purchasing a QLAC with an annuity premium value equal to the lesser of 25% of the account value or $125,000.
Pairing this product with an investment account can provide a best of both worlds approach to ensuring retirement income security.
The straightforward approach to combining a QLAC with a traditional investment account will likely appeal to many middle class clients who are not interested in the complications that retirement income planning can present—this approach can give the client a simple and easily understood option that may not currently be available.
Originally published on Tax Facts Online, the premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.
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