How much money you will need to save to enjoy a secure retirement depends on the ultimate unknowable: How long will you live?
The possibility of running short is called longevity risk, and the Obama administration last year established rules to foster a new type of annuity, the Qualified Longevity Annuity Contract (QLAC), that would provide a steady monthly payment until you die.
QLACs are a variation on a broader product category called deferred income annuities, which let buyers pay an initial premium or make a series of scheduled payments and set a future date to start receiving income. Deferred annuities are less expensive to buy than immediate annuities, which start paying out monthly as soon as you purchase them.
You can purchase the plans at or near your retirement age, typically 70, with payouts starting much later, usually at 80 or 85.
The advantage of these QLAC plans is that they provide some guaranteed regular income until death, so they can supplement Social Security. And the deferred feature allows you to generate much more income per dollar invested.
Despite the benefits, annuities have lagged in popularity. The White House thought it could encourage more people to buy deferred annuities if they could be purchased and held inside tax-deferred IRAs and 401(k) plans.
The problem it had to fix was that required minimum distributions mean that 401(k) and IRA participants must start taking withdrawals at age 70-1/2, which conflicts with the later payout dates of longevity annuities.
The new rules state that if a longevity annuity meets certain requirements, the distribution requirement is waived on the contract value (which cannot exceed $125,000 or 25 percent of the buyer’s account balance, whichever is less).
That not only makes a deferred annuity possible inside a tax-deferred plan, it also can encourage their use for anyone interested in reducing the total amount of savings subject to mandatory distributions.
Sixteen insurance companies are now selling QLAC variations, up from just four in 2012. Employer sponsors of 401(k) plans are showing more interest in adding income options to their plans, but they have been slow to add annuity options. Still, MetLife Inc is one insurance company testing this market, with a 401(k) product introduced last month.