The Treasury Department changed required minimum distribution rules so that it’s easier for people to use longevity annuities in their 401k plans and IRAs. It is now time for employers and plan sponsors to get on board and start offering more annuity options in the retirement plans. Steve Vernon’s CBS Moneywatch article “This annuity has you covered if you live long” talks about the importance of longevity annuities. It will be easier for employees to use longevity annuities to get lifetime income from their retirement plans thanks to the Treasury ruling. Qualifying longevity annuity contracts (QLACs) are contracts made with an insurance company to pay you guaranteed lifetime income when you are at an advanced age. Most contracts start paying you out at age 80 or 85. This income lasts for the rest of your life, even if you are lucky enough to live past 100.
Longevity annuities are usually purchased close to retirement age or right when you retire. Since they don’t typically pay you income until years after retirement, you have to use other assets to fund your early retirement years. Some people choose an immediate annuity paired with Social Security to finance their retirement until their longevity annuity payments begin. You could also draw down some of your other investments during the early years of retirement. In the past, you were required to take a minimum distribution from your 401k and IRA savings accounts starting at the age of 70 1/2. For someone that age with $100,000 in their account, the 3.65% requirement would equal a mandatory $3,650 withdrawal each year. You are now able to invest either 25% of your account assets or $125,000, whichever amount is less, in a longevity annuity that will not require the minimum distribution amount at age 70 1/2.
Qualified longevity annuity contracts help you pay your retirement living expenses without having the fear that you will run out of money sometime during your retirement. It’s recommended that less than a quarter of your retirement savings be used to buy a QLAC, so that you can use the rest to fund your early retirement years. It is wise to keep a portion of your savings liquid. Ideally, expenses will be less in your later years with the exception of health care costs. Many people use long term care insurance to help meet the increasing cost of health care later in life. QLAC’s can also have death benefits that pay income to a beneficiary or return your premium to them in the case that you die before receiving your benefits. If you choose to add on death benefits, your monthly payments will be reduced.
Not many retirement plans are currently offering QLAC’s as options to their employees. Some companies have said that they will offer more choices when employees show interest in the products. If you and your coworkers would like longevity annuities included in your 401k plan options, let it be known so that your employer takes a closer look at the products. With the change in the Treasury rules, more companies will be offering these annuity options and more insurers will be issuing products to meet an increasing demand. The Treasury Department made these changes because they believe that longevity annuities providing lifetime income are one of the best ways for Americans to ensure they have enough retirement income so they don’t outlive their savings.
Written by Rachel Summit