Ian is 69 and plans to retire next year. His Social Security benefits will begin in the coming year. Ian has begun to focus on how he's going to live during his retirement without wages coming in. Ian is a widower so he's planning for himself only. Of course, Social Security provides a base monthly cash flow. His annual social security benefit will be $30,000. That only covers about 1/2 of the projected cost of living during retirement.
Fortunately, Ian invested in a traditional individual retirement account while working. His IRA Account balance is $500,000. Ian's brother-in-law, Fred, is a CPA. Fred agreed to analyze Ian's retirement numbers. Here's what happened. First, Fred brought up an old rule of thumb. A retiree can withdraw 4% per year from an IRA and not run out of retirement money. For Ian, 4% equals $20,000. Adding the $20,000 to $30,000 in Social Security benefits, Ian has $50,000 of annual retirement income.
That's less than Ian had hoped for. But, Fred added, the 4% rule of arose in an era when interest rates were much higher than today. By conventional wisdom, retirees should weight their Investments towards interest income-producing assets. Today, prudent planning suggests assuming a 2% rate of return in an IRA during retirement. With a 2% return and a $20,000 annual withdrawal, Ian's Ira will go to zero by age 100. Ian asked what would happen if the annual IRA withdrawal was $30,000? If the annual IRA withdrawal was $30,000, the IRA account will be empty by age 89. Ian seemed relieved at this news.
Then, Fred pointed out that at current mortality, Ian has 50% probability of living to age 89. There is an equal probability that an will outlive his IRA savings if he withdraws $30,000 annually. Fred's advice at this point was for Ian to look at his expenses and determine if where he could cut back. It wouldn't be prudent to take more than $20,000 a year out of his IRA during Ian's retirement.
Fred called Ian to say that he had an idea. Fred learned of a new insurance product. A Qualified Longevity Annuity Contract. This annuity can be purchased with IRA assets. A withdrawal from the IRA pays the premium. And it's not taxed. A QLAC beneficiary can defer distribution to age 85. Once begun, the QLAC pays benefits for the life of the beneficiary. QLAC distributions are taxable to the beneficiary, but only when paid. The QLAC premium amount is limited to the lesser of $130,000 or 25% of the IRA balance. Ian can invest up to ($500,000 x .25) = $125,000 in the QLAC and defer the life annuity start date until his age 85.
The QLAC benefit from a leading insurance company would be $33,333 per year for the rest of Ian's life. Running the numbers, Ian's maximum QLAC premium will enable Ian to achieve his income goals after age 84.What kind of distributions will the remaining IRA assets support for the next 15 years? Ages 70 up until 85?
Ian asked, even if the IRA balance is reduced to $375,000 and earns no income? Fred explained Ian can withdraw $25,000 each year until age 85. A 2% earnings rate in the iRA would justify a $30,000 annual distribution in each of the fifteen years. Doing so, Ian can meet all his retirement income targets. No matter how long he lives!
"Good-news-bad-news. Fred, what's the catch?" Ian asked. Fred said the QLAC annuity is for life. There's no surrender option. So, choose the carrier with an eye on its Financial Strength not it's Payout Ratio. When you die the QLAC payments stop. Only the residual IRA balance will be left for your children. It is possible to buy a QLAC that guarantees a return of at least the premium (e.g., the $125,000 premium) if you die early. Of course, such an annuity pays a lower benefit than a QLAC without a Return of Premium provision. For you, this 2nd alternative is not a good choice. Fred said, "Your primary concern is to avoid running out of money -- not worrying whether or not your heirs receive something." "Remember, a QLAC is more like a social security benefit than an investment account." To see how the strategy outlined above might work for you, try the Failsafe (SM) Maximize Income Calculator.
For information about QLACs including frequently asked questions, articles, and links to authoritative information; or links to providers' annuity quotes, please call 800-460-4166 or visit www.QLACguru.com.
Notice: The foregoing video and examples do not portray any one person’s situation. The dramatizations were prepared by the Company to introduce viewers to a new financial product, a Qualified Longevity Annuity Contract. Individual circumstances of a viewer are likely to vary from the examples in the videos. The videos are not tax or legal advice. The financial information, and calculations depicted in these videos are supplied from sources we believe to be reliable. However, we are unable to guarantee their accuracy. These materials are not intended to replace the viewer’s legal, tax and accounting advisors. Any viewer should seek advice from his or her qualified advisors prior to entering into a QLAC purchase. The Company accepts no responsibility for any outcome arising from a QLAC purchase or a failure to make a QLAC purchase. This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties.