SPRINGFIELD, Mass., Nov. 16, 2016 – Running out of money is the number one fear of many people approaching retirement, according to the LIMRA Secure Retirement Institute.1 The average American retiring at age 65 today can reasonably expect to spend the next 20 to 30 years in retirement, meaning retirement savings may have to last longer than ever before.
This is one reason why deferred income annuities – also called “longevity annuities” – have become so popular with consumers in recent years. Deferred income annuities can help solve for some of the risks associated with longevity – like increased health care costs – by providing a stream of future income that can last a lifetime.
There’s been a catch-22, however, for owners of qualified assets, such as those in a traditional IRA or 401(k) plan, who wanted to use those assets to fund a deferred income annuity. The Internal Revenue Code (IRC) generally requires that distributions from these qualified assets must begin no later than age 70½. Required Minimum Distribution (RMD) rules make it difficult for owners of qualified assets to plan for late-retirement income needs.
In response to the need for greater flexibility for owners of qualified assets, Massachusetts Mutual Life Insurance Company (MassMutual) recently expanded its deferred income annuity product offering by making it available as a qualified longevity annuity contract (QLAC).
A QLAC is a deferred income annuity offered by an insurance company that allows distributions to begin after age 70 ½. Approved in 2014 by the IRS and the U.S. Department of the Treasury, new rules allow owners of qualified assets to delay receiving distributions from the assets in a QLAC up until a maximum age of 85; once distributions begin, all standard RMD rules apply.
Because of strict IRS limits on how a QLAC can be established and funded, this option isn’t right for everyone. However, when it is set up and maintained correctly, a QLAC may help the owner to:
- Supplement Social Security retirement benefits or pension benefits with a predictable stream of future income.
- Transfer some of the risks associated with longevity to the insurer. Future income is guaranteed, no matter how long the owner lives or what happens in the financial markets.
- Manage RMDs and plan for expenses that may become a priority later in retirement (such as increased health care costs).
“No matter how you envision retirement, having the freedom to live life your way will depend, at least in part, on having a secure source of income you cannot outlive,” said Craig Waddington, actuary and head of retail solutions deployment at MassMutual. “Although no one can predict the future with 100% accuracy, there are steps you can take today to prepare for a more secure and comfortable future, no matter how long your retirement lasts.”