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A New Retirement-Income Option for IRAs At Fidelity
Below is a more informative video on this new product. New York Life will be jumping into the QLAC fray next year. When I turn 70 in 2017 that is where I will be putting my $125,000. I will begin taking my benefits at age 80 - God willing. I have enough to live off my principal till death do I part if necessary. But I really like this new product so will use some of that nest egg there.
Anyone have a calculator that shows approximate pay-out at age 80 for a hypothetical 100K investment? Just trying to get some rough idea. Couldn't download the wsj article without subscription. Read some general info. elsewhere.
It looks like it will calculate payouts starting any time (immediately or deferred) for money that you annuitize now (i.e. pay the insurance company now for the guaranteed stream of income regardless of when the checks start rolling in).
msf - Thanks. A very helpful calculator. The linked article addresses the new Treasury rules in depth. Except for this question: Is there a cut-off date for taking advantage of this new rule and starting a QLAC? I'm guessing it must be done sometime before you reach the date of your first RMD - but not sure.
I'm wondering which scenario would be more beneficial, should a 55 year old:
#1. Wait until age 70, allowing the IRA to grow tax deferred to potentially get closer to the $125K max.
or,
#2. Purchase a smaller QLAC (25% of present IRA value) at an earlier age (55) which would provide the time value (buy at 55 distribute at 85) to work in your favor.
Hopefully a QLAC calculator will answer this question soon.
Interesting - I was going to link that article, but figured I'd wind up writing too much text around my link (I also wanted to cross check the calculator figures with the ones in the article, and didn't get around to that).
I thought most of the comments following the Kitces article were very good: the first gives a step-by-step procedure to getting a handle on the IRR; the second makes the same point I've posted here (that having a late term guaranteed income stream allows you to be more aggressive with your portfolio); the third compares a DIY system (acknowledging that DIY comes up slightly short, but with greater flexibility).
I haven't seen restrictions on purchase ages; in the absence of any, I'd guess that you'd have to purchase by the age of 83.5 or so. (That's because the policies must start payments by age 85, and these are deferred income annuities that typically require you to start payments at least 13 months after you buy them.)
I'm curious about starting ages and am still looking. Note that the max of 1/4 of IRA means that you'll likely be limited in how much you can buy if you wait until after age 80 (since you'll have been taking a decade's worth of RMDs in the meantime). All speculation so far, though.
A question I have is whether the QLAC payments would be considered IRA distributions for state tax purposes (I don't see why not). This matters because several states exempt some or all of IRA distributions from state income tax.
"The cumulative dollar amount invested into ALL QLACs across all retirement accounts may NOT exceed the LESSER of $125,000 (original regulations were only $100,000), or the aforementioned 25% threshold."
Can I assume that when doing this calculation that I combine all retirement accounts (tax deferred as well as tax free), not just the IRA accounts impacted by RMD?
Maximum purchase age - haven't found an absolute upper limit (beyond the obvious that it can't be above 85, since payments must begin by then). But I did find a commercial QLAC offering that allows purchases up to age 83. So it appears my thinking (that the max would be somewhere between 83 and 84) is sound.
Hopefully a QLAC calculator will answer this question soon.
Yep - good questions bee. I'm assuming you looked at the Fidelity calculator msf already linked. It does allow you to set the time you start receiving funds (but assumes an immediate investment). Probably doesn't go far enough to answer your question.
If I wanted to dig deeper today (I don't) I'd just take one of the readily available compound interest calculators and run some hypothetical amounts on my own over the same time periods comparing the to how I'd fare with the annuity. What the annuity offers is a degree of certainty on payout - while the markets can go anywhere over shorter terms. Also, that you won't outlive your income stream. But - Yikes, at 85 how many good years will most of us have left to pursue our interests?
My problem is that I have converted enough to Roths where more than half of retirement funds are now exempt from RMD. So, RMD isn't going to impact me much. I'm already taking out each year more than the required RMD amount would be on the non-Roth investments. But, I wouldn't mind sinking a relatively small amount into one of these products.
With regard to using Roth IRA dollars for longevity risk Julian commented at the end the kitces article with this:
"I agree with you that there are better hedges for old age than longevity annuities. In a Roth IRA or non-retirement account, one option is to purchase U.S. Treasury STRIPS that mature at perhaps 80 or 85 years of age and at maturity time, buy an immediate life annuity with the proceeds. This has several advantages over a longevity annuity purchased years or even decades in advance: (1) the bonds can be cashed out prior to maturity and may be worth considerably more than their cost if held for many years, (2) the counter party risk (i.e., of an insurance company going insolvent) is eliminated, (3) not all -- or any -- of the maturing bond proceeds have to be committed to the immediate annuity, and (4) if one spouse dies -- or has significantly impaired health -- prior to purchase of the immediate annuity, the immediate annuity can be written for larger annual payouts than would be possible with a longevity annuity (e.g., written as a single life annuity or an impaired life annuity). By my calculations, if I purchase the STRIPS around age 60, then after about age 80-85, the IRR with this method is about 50 bp less than with a longevity annuity. However, this seems like a small price to pay for the advantages and flexibility outlined above."
"The cumulative dollar amount invested into ALL QLACs across all retirement accounts may NOT exceed the LESSER of $125,000 (original regulations were only $100,000), or the aforementioned 25% threshold."
Can I assume that when doing this calculation that I combine all retirement accounts (tax deferred as well as tax free), not just the IRA accounts impacted by RMD?
I think the wording wasn't great. Short answer, no (or better stated, I don't think so).
There are two separate limits; you have to satisfy both of them:
$125K total QLAC purchases inside your TIRAs, 401(k)s, 403(b)s, etc.
25% of each 401(k) balance (for a QLAC within that 401(k)), and 25% of combined TIRA balances (for QLACs in one or more of the TIRAs).
" Specifically, the amount of the premiums paid for the contract under an IRA may not exceed an amount equal to 25 percent of the sum of the account balances ... of the IRAs (other than Roth IRAs) that an individual holds as the IRA owner." http://www.irs.gov/irb/2014-30_IRB/ar07.html
So you're not allowed to count your 401(k) or Roth IRA balance in computing how much you're allowed to buy within an IRA. That's limited strictly to 25% of the TIRA balances.
It gets even more complicated if you've already purchased a QLAC. Those premiums count toward the $125K max (and toward the 25%). The value of the QLAC also counts towards the value of your IRA (increasing the denominator for the 25% calculation).
Not sure if the below was linked but answers a lot of questions on the three firms that offers QLACs through Fidelity and more. I also like the annuity calculator below. Looks like maximum age is 82 to purchase one. Personally, would take benefits beginning at 80 and not 85. I hike with some hearty 80 year olds, but not so above 85. For me one of the allures of the $125,000 is it is that much less against my nest egg that is subject to RMD. Also, instead of simply living off my principal till death do I part it gives me an income flow beginning at 80 other than SS. I guess I could also go the individual corporate bond route for income (instead of simply living off my nest egg principal) if I ever decided to 100% abstain from trading. Albeit psychologically can't see that happening.
Here is my question to the above products. Does the cost of purchase always stay the same; with inflation taken into consideration. In other words if the market takes one (heck) of a beating, will it cost less after the beating? Derf
You have options with this product as with any annuity, But the highest monthly payout is no death rider and no inflation rider just the plain vanilla QLAC. And you are paid for your lifetime. Should I pass before I collect it really won't matter to me. But I am hoping I have some of my Mom's genes who is 95 and still going strong living by herself at home.
Here is my question to the above products. Does the cost of purchase always stay the same; with inflation taken into consideration. In other words if the market takes one (heck) of a beating, will it cost less after the beating? Derf
Maybe, but if so, not by much.
When you annuitize most annuities (fixed annuities, immediate annuities, deferred income annuities, etc.), you get a promised fixed stream of payments. Those streams come out of the insurance company's general account (i.e. they're just unsecured liabilities of the insurer). So to guess at how much effect the market has on annuity prices it would make sense to look at where the insurance companies invest their assets.
According to the Chicago Federal Reserve, on average insurance companies invest only 2.3% of their assets in equities. So whatever impact the equity market has is going to be miniscule. On the other hand, since 3/4 of their portfolio is in bonds (with another 10% in mortgages), the credit market should have a much bigger impact on pricing.
I've read several people suggest that even the credit market won't have much of an impact on purchase costs. That's because with annuity payments deferred for decades, most of the money for the checks is coming from other policies where the owners didn't collect (died), and not directly from insurance company investments.
Inflation is in a sense a non-factor. To the extent that inflation is reflected in the credit markets, and that the credit markets affect the cost of a policy, inflation will affect costs. But otherwise, it doesn't affect things. Basically, if you pay $100K for $X/month, that's going to be the nominal price regardless of inflation. (The problem is that the first $X check could be worth somewhat less if inflation is low, or a lot less if inflation is high between now and the time you get that first check.)
What does have the potential to significantly affect prices is longevity. If people start living longer, insurance companies will be more likely to pay out, and pay out longer. So costs will go up. On the other hand, if life expectancies drop, so will the cost of these policies.
In reality annuities are a poor investment. Even more so in this low interest rate environment. The article above has some errors but makes two good points. An annuity can give you piece of mind and are best for those who live to a ripe old age into the 90s. If you purchase a QLAC for the maximum amount of $125,000 at age 70 and receive payments beginning at 80, those first five years you are basically just getting back your $125,000. I may rethink these QLACs when I turn 70 and hopefully have a larger nest egg.
Comments
http://www.economials.com/2015/08/video-how-to-make-sure-you-dont-outlive-your-money/
Question number 2. WTF ?!?!?!?!
It looks like it will calculate payouts starting any time (immediately or deferred) for money that you annuitize now (i.e. pay the insurance company now for the guaranteed stream of income regardless of when the checks start rolling in).
https://www.kitces.com/blog/why-the-new-qualifying-longevity-annuity-contract-qlac-rmd-regulations-for-dont-mean-much-for-retirement-income-yet/
#1. Wait until age 70, allowing the IRA to grow tax deferred to potentially get closer to the $125K max.
or,
#2. Purchase a smaller QLAC (25% of present IRA value) at an earlier age (55) which would provide the time value (buy at 55 distribute at 85) to work in your favor.
Hopefully a QLAC calculator will answer this question soon.
I thought most of the comments following the Kitces article were very good: the first gives a step-by-step procedure to getting a handle on the IRR; the second makes the same point I've posted here (that having a late term guaranteed income stream allows you to be more aggressive with your portfolio); the third compares a DIY system (acknowledging that DIY comes up slightly short, but with greater flexibility).
I haven't seen restrictions on purchase ages; in the absence of any, I'd guess that you'd have to purchase by the age of 83.5 or so. (That's because the policies must start payments by age 85, and these are deferred income annuities that typically require you to start payments at least 13 months after you buy them.)
I'm curious about starting ages and am still looking. Note that the max of 1/4 of IRA means that you'll likely be limited in how much you can buy if you wait until after age 80 (since you'll have been taking a decade's worth of RMDs in the meantime). All speculation so far, though.
A question I have is whether the QLAC payments would be considered IRA distributions for state tax purposes (I don't see why not). This matters because several states exempt some or all of IRA distributions from state income tax.
"The cumulative dollar amount invested into ALL QLACs across all retirement accounts may NOT exceed the LESSER of $125,000 (original regulations were only $100,000), or the aforementioned 25% threshold."
Can I assume that when doing this calculation that I combine all retirement accounts (tax deferred as well as tax free), not just the IRA accounts impacted by RMD?
American Pathway Deferred Income Annuity Qualified Longevity Annuity Contract FAQ:
https://estationsecure.americangeneral.com/SharedFilePile/CommonFiles/Annuities/AmericanPathwaySolutionsMYG/AGLC108007_FAQ_QLAC.pdf
Me too, probably, in identical circumstance.
If I wanted to dig deeper today (I don't) I'd just take one of the readily available compound interest calculators and run some hypothetical amounts on my own over the same time periods comparing the to how I'd fare with the annuity. What the annuity offers is a degree of certainty on payout - while the markets can go anywhere over shorter terms. Also, that you won't outlive your income stream. But - Yikes, at 85 how many good years will most of us have left to pursue our interests?
My problem is that I have converted enough to Roths where more than half of retirement funds are now exempt from RMD. So, RMD isn't going to impact me much. I'm already taking out each year more than the required RMD amount would be on the non-Roth investments. But, I wouldn't mind sinking a relatively small amount into one of these products.
Sorry I can't answer your questions.
"I agree with you that there are better hedges for old age than longevity annuities. In a Roth IRA or non-retirement account, one option is to purchase U.S. Treasury STRIPS that mature at perhaps 80 or 85 years of age and at maturity time, buy an immediate life annuity with the proceeds. This has several advantages over a longevity annuity purchased years or even decades in advance: (1) the bonds can be cashed out prior to maturity and may be worth considerably more than their cost if held for many years, (2) the counter party risk (i.e., of an insurance company going insolvent) is eliminated, (3) not all -- or any -- of the maturing bond proceeds have to be committed to the immediate annuity, and (4) if one spouse dies -- or has significantly impaired health -- prior to purchase of the immediate annuity, the immediate annuity can be written for larger annual payouts than would be possible with a longevity annuity (e.g., written as a single life annuity or an impaired life annuity). By my calculations, if I purchase the STRIPS around age 60, then after about age 80-85, the IRR with this method is about 50 bp less than with a longevity annuity. However, this seems like a small price to pay for the advantages and flexibility outlined above."
There are two separate limits; you have to satisfy both of them:
- $125K total QLAC purchases inside your TIRAs, 401(k)s, 403(b)s, etc.
- 25% of each 401(k) balance (for a QLAC within that 401(k)), and 25% of combined TIRA balances (for QLACs in one or more of the TIRAs).
http://www.cpapracticeadvisor.com/news/11651859/irs-issues-new-regs-for-longevity-annuities-exempt-from-rmd-rules" Specifically, the amount of the premiums paid for the contract under an IRA may not exceed an amount equal to 25 percent of the sum of the account balances ... of the IRAs (other than Roth IRAs) that an individual holds as the IRA owner."
http://www.irs.gov/irb/2014-30_IRB/ar07.html
So you're not allowed to count your 401(k) or Roth IRA balance in computing how much you're allowed to buy within an IRA. That's limited strictly to 25% of the TIRA balances.
It gets even more complicated if you've already purchased a QLAC. Those premiums count toward the $125K max (and toward the 25%). The value of the QLAC also counts towards the value of your IRA (increasing the denominator for the 25% calculation).
https://www.fidelity.com/annuities/deferred-fixed-income-annuities/compare
https://www.immediateannuities.com/
Derf
When you annuitize most annuities (fixed annuities, immediate annuities, deferred income annuities, etc.), you get a promised fixed stream of payments. Those streams come out of the insurance company's general account (i.e. they're just unsecured liabilities of the insurer). So to guess at how much effect the market has on annuity prices it would make sense to look at where the insurance companies invest their assets.
According to the Chicago Federal Reserve, on average insurance companies invest only 2.3% of their assets in equities. So whatever impact the equity market has is going to be miniscule. On the other hand, since 3/4 of their portfolio is in bonds (with another 10% in mortgages), the credit market should have a much bigger impact on pricing.
I've read several people suggest that even the credit market won't have much of an impact on purchase costs. That's because with annuity payments deferred for decades, most of the money for the checks is coming from other policies where the owners didn't collect (died), and not directly from insurance company investments.
Inflation is in a sense a non-factor. To the extent that inflation is reflected in the credit markets, and that the credit markets affect the cost of a policy, inflation will affect costs. But otherwise, it doesn't affect things. Basically, if you pay $100K for $X/month, that's going to be the nominal price regardless of inflation. (The problem is that the first $X check could be worth somewhat less if inflation is low, or a lot less if inflation is high between now and the time you get that first check.)
What does have the potential to significantly affect prices is longevity. If people start living longer, insurance companies will be more likely to pay out, and pay out longer. So costs will go up. On the other hand, if life expectancies drop, so will the cost of these policies.