Recently I have thought a lot about QLAC and Social Security Strategies for my long-term retirement funding. The big worry for anyone funding retirement from their portfolio is running out of money late in life. My retiring early means my portfolio has even more funding burden to bear.
I am not a financial planner and I will eventually have this conversation with one. The new Qualified Longevity Annuity Contract (QLAC) was approved by the US Treasury in 2014. I believe there are many retirement funding strategies available for consideration. I can see how a QLAC could be part of any systematic withdrawal or bucket strategy being used.
Why I ‘m Intrigued by QLAC
By introducing a QLAC into my portfolio it may also change the Social Security strategy we all often hear about. That standard financial Social Security advice for longevity protection by delaying your Social Security until age 70. That means your portfolio ends up carrying the retirement funding burden longer. There are tax strategies to consider where you draw-down taxable retirement accounts before beginning Social Security. This is due to the low taxable Social Security income thresholds that are in place and the RMD starting at age 70 ½. Fortunately the QLAC offers additional tax benefits that we can include in our QLAC and Social Security Strategies. Taxes we can save from being handed over means extra money to fund our retirement.
QLAC and Social Security Strategies – Basic Core Details
Here are some basic high-level details.
QLAC- Qualified Longevity Annuity Contract
The new QLAC allows you to take up to $125,000 or 25% of your portfolio balance (whichever is less) to buy a low-cost annuity contract to begin making payments to you later in your life. You can choose a QLAC payment start date anytime up until your age 85. QLACs also have favorable tax benefits as they are not subject to age 70 ½ RMD. Your QLAC RMD is delayed until you begin taking payments.
Social Security allows you to begin receiving payments at age 62 or anytime up to age 70. By delaying beyond full retirement age you receive extra credits that increase your payment above what is your full Social Security. Your full retirement age falls between ages of 65 and 67 depending on the year you were born. Social Security payments to you can be taxed depending on any other taxable income you receive. This includes IRA/401K withdrawals, pensions, and annuities. The Income thresholds are set and not adjusted with inflation. They are low enough that most retirees with retirement savings will be snagged.
RMD- Required Minimum Distributions
RMD begins at age 70 ½. The amount required to withdraw is based on a table. It takes into account your IRA / 401K total balance and your age. You are then required to withdraw at least that amount each year and pay taxes. Large IRA balances not only mean a larger tax bill for any income forced to withdraw over what you really needed but it can also push your Social Security into taxable territory too.
QLAC and Social Security Strategies – Seeing a Different Way
I believe introducing a QLAC into my strategy offers a different way to do things. Having guaranteed income for old age reduces some pressure on my portfolio.
- A portfolio having to be large enough with decent performance to fully fund many years in retirement.
- A portfolio being able to sustain us through market swings to an unknown age and number of years.
My first strategy that I had initially thought about doing
- Delay my Social Security until age 70. My wife begin hers at full retirement age.
- Fund our retirement from the portfolio which would draw it down due to its full funding burden until all of our Social Security begins.
- Roth conversions. Watching the 15% taxable income thresholds and staying just below them when converting IRA money to a Roth IRA before beginning Social Security payments. This will reduce my chances of having Social Security also taxable and also reduce RMD impacts.
- RMD begins at age 70 ½. Depending on the size of our IRA balance, it is always possible there will be negative tax impacts to Social Security and our overall tax rate.
Now Considering a QLAC I would
- Plan on us both beginning Social Security at our Full Retirement Age. (3.4 years earlier for me)
- At age 60 use $125,000 from my IRA to purchase a QLAC with full survivor rider to begin payments starting at age 75.
- At age 60 use $50,000 from my wife’s IRA to purchase a QLAC with full survivor rider to begin payments starting at age 80.
- Fund our retirement from the portfolio which would draw it down due to its full retirement funding burden until our Social Security begins.
- Roth Conversions. Watching the 15% taxable income thresholds and staying just below them when converting IRA money to a Roth IRA before beginning Social Security payments. Attempting to reduce chances of having Social Security also taxable and reduce IRA balances prior to RMD.
- RMD begins at age 70 ½ for IRA balances. But my QLAC’s $125K RMD starts at age 75 and my wife’s $50K QLAC RMD starts at age 80. QLACs reduce early RMD withdrawals. We will still hope that RMD does not cause too much negative tax impacts to Social Security and our overall tax rate.
The idea is to reduce the earlier funding burden from our portfolio while still providing for our older age.
By having the QLACs it would allow us
- To have more investment and withdrawal options.
- To counter my taking Social Security before age 70 which means a lower Social Security payment. The QLACs may counter that for our longevity purposes.
- To leave the Money that is now not pulled from the portfolio between my full retirement age and age 70 to stay invested longer.
- To delay QLAC totals from the age 70 ½ and following years RMD. Thus reducing amounts and taxes until age 75 for myself and 80 for my wife.
- To have a higher systematic withdrawal rate from the portfolio earlier in our retirement. Since longevity now has some guaranteed added retirement income from the QLACs, the portfolio will not have to carry it alone.
I have a few years before I hit the age of 60. That is when I want to really lock some of these ideas down. Hopefully interest rates rise a bit to make QLAC annuity payouts more attractive. However in the meantime you can bet I will be having a conversation with my financial planner about the different possibilities.
For the most part I have never liked annuities. They are expensive and complicated. The QLAC has my interest because of its low-cost and government defined rules that even the insurance-annuity industry can’t really mess with. They can’t weigh it down with high fees or useless and costly bells and whistles.
I am not a financial planner and all of this is for general information only. The purpose of this page is to offer different ways to look at our early retirement and later year’s retirement funding. QLACs are relatively new and few people know about them. I think QLACs can be added to our Social Security, Tax, RMD, and longevity strategies.
As I find new possibilities I want to share them and allow you to investigate and make your own decisions. What works for me may not for you as we all have different needs, concerns, and of course portfolios. As always if you need financial help go get it.
QLAC and Social Security Strategies is something I have just started to consider. As time goes on and I learn more about things, I will be able to better fine-tune my systematic withdrawal, Social Security, RMD strategies and include some portfolio longevity funding relief.