An average 65-year-old man today can expect to live to age 84. For a 65-year-old woman, it's age 87. And those are just averages.
If outliving your savings is a big fear, one relatively new option to make your money last in retirement has become more widely available—a qualified longevity annuity contract, or QLAC.
In July 2014, the Internal Revenue Service and Treasury Department ruled that QLACs, a type of deferred income annuity, could be included in IRAs or other retirement accounts. Under current rules, investors are allowed to put up to $125,000 from a traditional IRA or employer-sponsored retirement plan into a longevity annuity that pays out at a much later date, anywhere from age 70½ years until age 85 (with payments increasing the longer you wait).
The advantages of a QLAC are that they provide a stream of lifetime income if an investor reaches old age and contributions to a QLAC can decrease required minimum distributions from an IRA or retirement plan that occur once an investor turns age 70½.
"For someone who doesn't need all the money now, [a QLAC] can be a valuable tax reduction tool," said Gilbert Armour, a certified financial planner at Sagepoint Financial in San Diego.
In August, Fidelity Investments, the nation's largest provider of retirement accounts, began offering QLACs from Guardian Life Insurance, MetLife and Principal Financial Group to its IRA investors.
Ten insurers now provide QLACs, according to insurance research and consulting firm LIMRA. They are AIG, Americo, Guardian, Lincoln Financial, MetLife, New York Life, Northwestern Mutual, Pacific Life, Principal and Thrivent Financial. MetLife is currently the only provider offering QLACs to employer-sponsored retirement plans, such as 401(k)s, according to LIMRA.
If you want to invest in a QLAC, it will take some effort to research the best options."The biggest caveat for the clients is to do some comparative shopping before deciding which company to use," said Rose Swanger, a certified financial planner in Knoxville, Tennessee.
But it can be worth the effort. Buying a QLAC early means a bigger benefit down the road.
"The biggest mistake a client can make when buying a QLAC, assuming the client doesn't need the income before 75 or so, is not purchasing a QLAC soon enough," said Robert Klein, a certified financial planner and president of the Retirement Income Center in Newport Beach, California. "The sooner you purchase it, the longer the deferral period and the greater the income you will receive."
To be sure, low interest rates mean that annuity payments, including those from QLACs, are relatively modest now and investors run the risk that inflation will eat away at payouts over time.
That said, it's early days for QLACs. "They will increase in popularity as more carriers offer them," Klein said. "I believe that higher net worth individuals with large IRA balances will gravitate toward them if the current investment limitation of $125,000 is meaningfully increased."
But not everyone is so optimistic. Chris Chen, a certified financial planner in Waltham, Massachusetts, finds QLACs to be a "clumsy answer" to retirement income.
"People who would benefit—people with not enough resources for a long retirement—will tend not to buy [QLACs] precisely because they don't have enough resources," Chen said. "People with plenty of resources won't need them. People in between will be stuck in analysis paralysis."