QLACs: A New Tool for Retirement Income

The deferral feature of DIAs can be a tough concept for buyers to accept–handing over a large sum of dollars with a far-off, uncertain return. And, while the upfront investment is lower, you’re still left with the challenge of managing your assets to generate sufficient income while waiting for the annuity income to start flowing at age 80 or 85.

Joe Tomlinson

Joe Tomlinson

For that reason, actuary and financial planner Joe Tomlinson prefers single premium income annuities (SPIAs). “This aspect of a deferred-annuity purchase is downplayed sometimes, unfortunately,” he says. “What I always hear people say is that all you have to do is make your money last until you hit 85. That may sound easy, but it’s not uncomplicated when you consider investment risk. If the market drops 50% and you have half of your money in stocks, your income base falls 25%–it’s not a good situation.”

In an article earlier this year for Advisor Perspectives, Tomlinson ran a scenario comparing three strategies for providing longevity protection, using combinations of SPIAs and deferred annuities, and Treasury Inflation-Protected Securities (TIPS). The scenario was based on a 65-year-old female buyer.

Tomlinson chart QLAC

Tomlinson found that a no-refund SPIA provided the highest income with inflation-adjusted payments similar to Social Security; the downside was lack of liquidity and remaining assets to pass along to heirs. The greatest liquidity came from a DIA purchased at age 65 with payments beginning at 85 and TIPS used to generate income prior to 85, but that cost the buyer 10% in income.

Tomlinson concluded that no product was clearly superior to another–it’s a trade-off between liquidity and flexibility versus achieving higher income.

“The appealing feature of the QLAC is that you’re setting aside less money at 65 than you are for a SPIA. But you’ll need to dedicate significant savings to meet your living expenses until the QLAC payments begin, and the liquidity of those dedicated savings isn’t worth all that much.”

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