The QLAC is one of the ideas that could, potentially, reshape the assets of consumers who come to you for help with planning for the future. One popular lifetime income idea is to have 401(k) plan members convert some or all assets into a lifetime stream of income of 65, with an immediate annuity option, with benefits payments that would start immediately. The QLAC idea, which was given a name, and a regulatory framework, by Internal Revenue Service rules released in 2014, would have plan members feed some or all plan assets into a deferred income annuity. The payments from the deferred income annuity might start 20 years in the future, after the plan member turned 85. Supporters of the use of the QLAC strategy say deferred annuitization would give workers more bang for the buck. Workers could use a relatively small portion of their assets to create a big income stream in the future, when they would be very old, might have little or no ability to work, and might have a relatively high risk of needing long-term care services.
VanDerhei has analyzed how use of QLACs might affect workers who convert various percentages of retirement plan assets into QLACS, and who die at various ages. VanDerhei himself has not take any position on whether QLACs are good or bad, or who might want to use or avoid QLACs. He has simply crunched the numbers. But his crunched numbers imply what financial professionals who counsel individual clients might expect: One size would not necessarily fit all retirement planning clients. The crunched numbers suggest that the QLAC concept could be great for very thrifty workers who convert 30% of their assets into QLACs and live past 99. But the analysis also suggests that the concept could hurt some other very thrifty workers, who convert 30% of assets into QLACs and then die before age 90. The sweet spot might be for the moderately thrifty workers in the middle, who convert about 20% of assets into QLACs. Some would see a drop in retirement readiness of about 1.3% to 1.5%, but workers in that asset conversion range who lived past 90 would get EBRI readiness increases ranging from 2.9% to 12.2%.
A copy of the EBRI paper is available here, behind a paywall. — Read QLAC Regulations: Why They Should Matter to You, on ThinkAdvisor. — Connect with ThinkAdvisor Life/Health on LinkedIn and Twitter.
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