The “Failsafe Strategy” uses a traditional (not Roth) IRA account assets to provide lifetime retirement income, no matter how long the retiree lives.
This retirement planning approach employs a Qualified Longevity Annuity Contract or “QLAC”. If an annuity meets the IRS definition of a QLAC, IRA distributions taken to pay the QLAC premium are not taxable to the recipient. The QLAC annuity start date can be deferred to age 85 of the beneficiary.
To implement the Failsafe Strategy, an IRA owner divides retirement into two planning phases and purchases a QLAC with assets withdrawn from the IRA:
- Phase I - From the start of retirement to when the QLAC annuity payments begin (e.g. from 70th birthdate up to 85th birthday). During the Phase I period, the IRA owner withdraws funds from the IRA’s remaining assets in approximately equal monthly installments (e.g. for 180 months).
- Phase II - From the QLAC annuity start date (e.g. 85th birthday) until the retiree’s death. During Phase II the QLAC provides retiree monthly income. The IRA owner receives the QLAC annuity payments until he or she dies.
For many IRA owners, the maximum allowable QLAC premium (the lesser of 25% of IRA assets or $135,000) can buy a QLAC lifetime annuity with a benefit greater than or equal to the Phase I IRA payments. Thus, with proper planning, the combined benefits received during retirement Phases I and II can create a level, secure, lifetime stream of income, one that the benefit recipient cannot outlive. To see how the strategy outlined above might work for you, try the QLACguru FailsafeSM Maximize Income Calculator Page. If you prefer a pencil and paper approach, click to see Maximize Income Infographic on how to estimate your FailsafeSM income.
Purchasing a QLAC gives a retiree a known future income stream starting at a later date. This certainty allows a retiree in the earlier retirement years to spend retirement savings, with the knowledge that later retirement income needs will be taken care of by annuity payments for life.