An Annuity Game Changer?
How much money you’ll need in retirement depends on one big question, said Mark Miller in Reuters.com: “How long will you live?” Luckily, retirees have a relatively new tool at their disposal to help them plan for “life’s ultimate unknowable.” A new type of annuity known as a Qualified Longevity Annuity Contract, or longevity annuity, can provide a steady monthly payment until you die. Longevity annuities are a variation on deferred-income annuities: Buyers pay an initial premium up front and set a future date to start receiving monthly payouts. Sixteen insurance companies now sell them, up from four in 2012.
What makes longevity annuities different from other annuities is how they are funded, said Laura Medigovich in the Middletown, N.Y., Times Herald-Record. “The ‘Q’ in QLAC signifies the annuity is funded with qualified retirement money.” Treasury Department rules established just over a year ago allow such annuities to be purchased and held inside of 401(k) and IRA plans. Buyers can contribute up to $125,000 or 25 percent of their IRA or 401(k), whichever is less, to fund a longevity annuity. Once set aside, that money does not go toward the required IRA and 401(k) distributions (or the taxes on them) that retirees must start taking at age 70 ½. Most people set their annuity payments to begin much later in life, although they must start by age 85.
I predict longevity annuities are going to become very popular, said Stan Haithcock in MarketWatch.com. Right now they represent less than 1 percent of all annuities sold, but their simplicity and value are a “game changer” for the overly complex and “archaic” annuities industry. Of all annuity types, only longevity annuities offer a guaranteed lifetime income while also lowering your required minimum distributions and related taxes. The $125,000 cap also means the annuity can’t be overfunded, “a common buying mistake,” and they offer no liquidity, meaning your money can only be accessed via monthly payments. Nor do they accumulate value. “It is a future pension plan for all practical purposes.”
So are longevity annuities right for you? asked Janet Kidd Stewart in the Chicago Tribune. Just remember that it’s insurance, not an investment. These annuities provide a “floor of income” that’s independent of the whims of the stock market. But while some insurers offer inflation riders that protect payments once they begin, they don’t offer protection during the deferral, meaning your buying power could shrink. Today’s low interest rates, which affect payouts, and a current lack of competition in the market should also be considered when deciding whether, and how much, to buy.
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